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Industrial equipment manufacturer Kadant (NYSE:KAI) reported Q2 CY2024 results exceeding Wall Street analysts' expectations, with revenue up 12.1% year on year to $274.8 million. On the other hand, next quarter's revenue guidance of $263 million was less impressive, coming in 4% below analysts' estimates. It made a non-GAAP profit of $2.81 per share, improving from its profit of $2.54 per share in the same quarter last year.
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Kadant (KAI) Q2 CY2024 Highlights:
- Revenue: $274.8 million vs analyst estimates of $263.5 million (4.3% beat)
- EPS (non-GAAP): $2.81 vs analyst estimates of $2.43 (15.5% beat)
- Revenue Guidance for Q3 CY2024 is $263 million at the midpoint, below analyst estimates of $274 million
- The company slightly lifted its revenue guidance for the full year from $1.05 billion to $1.06 billion at the midpoint
- EPS (non-GAAP) Guidance for Q3 CY2024 is $2.42 at the midpoint, below analyst estimates of $2.68
- EPS (non-GAAP) Guidance for the full year is $9.93 at the midpoint, missing analysts' estimates by 1.1%
- Gross Margin (GAAP): 44.4%, up from 43.5% in the same quarter last year
- Free Cash Flow of $23.09 million, up 39.4% from the previous quarter
- Market Capitalization: $4.15 billion
Headquartered in Massachusetts, Kadant (NYSE:KAI) is a global supplier of high-value, critical components and engineered systems used in process industries worldwide.
General Industrial MachineryAutomation that increases efficiency and connected equipment that collects analyzable data have been trending, creating new demand for general industrial machinery companies. Those who innovate and create digitized solutions can spur sales and speed up replacement cycles, but all general industrial machinery companies are still at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales GrowthReviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Luckily, Kadant's sales grew at a decent 8.2% compounded annual growth rate over the last five years. This shows it was successful in expanding, a useful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Kadant's annualized revenue growth of 7.8% over the last two years aligns with its five-year trend, suggesting its demand was stable.
We can better understand the company's revenue dynamics by analyzing its most important segments, Fluid Handling and Industrial Processing, which are 33.6% and 41.8% of revenue. Over the last two years, Kadant's Fluid Handling revenue (piping, cleaning, and filtration) averaged 5.1% year-on-year growth while its Industrial Processing revenue (paper and timber processing equipment) averaged 7.1% growth.
This quarter, Kadant reported robust year-on-year revenue growth of 12.1%, and its $274.8 million of revenue exceeded Wall Street's estimates by 4.3%. The company is guiding for revenue to rise 7.7% year on year to $263 million next quarter, slowing from the 8.8% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 7.4% over the next 12 months, a deceleration from this quarter.
Operating MarginOperating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.
Kadant has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 16%. This result isn't surprising as its high gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Kadant's annual operating margin rose by 4.1 percentage points over the last five years, showing its efficiency has improved.
This quarter, Kadant generated an operating profit margin of 17.6%, in line with the same quarter last year. This indicates the company's cost structure has recently been stable.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Kadant's EPS grew at a remarkable 11.9% compounded annual growth rate over the last five years, higher than its 8.2% annualized revenue growth. This tells us the company became more profitable as it expanded.
Diving into the nuances of Kadant's earnings can give us a better understanding of its performance. As we mentioned earlier, Kadant's operating margin was flat this quarter but expanded by 4.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Kadant, its two-year annual EPS growth of 8.1% was lower than its five-year trend. We hope its growth can accelerate in the future.
In Q2, Kadant reported EPS at $2.81, up from $2.54 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Kadant's EPS of $10.29 in the last year to stay about the same.
Key Takeaways from Kadant's Q2 Results We were impressed by how significantly Kadant blew past analysts' revenue and EPS expectations this quarter. On the other hand, its full-year revenue and EPS guidance fell short of Wall Street's estimates. Zooming out, we think this was still a decent, albeit mixed, quarter, due to the softer outlook. The stock remained flat at $356.64 immediately following the results.
