Smelting and casting may sound incredibly boring, but metal companies can be a lot more compelling than they seem. Because they focus on specific specialities, the following three metal manufacturers could have great potential going forward.
Tungsten alloys driving superior growth
Kennametal (KMT 1.78%) is a really good example of a winning business model in metals. The company processes scrap metal along with other raw materials to produce tools, alloys, and powder coatings. Kennametal serves a diverse customer base of original equipment manufacturers (OEMs) ranging from airplane companies to the companies that produce mining drills.
The company derives its strength from a metal known as tungsten, which is primarily used as a hardening alloy in the majority of the company's products. In its latest investor presentation, Kennametal has stated that it wants to double its revenues in the next five years, and the company's acquisition of Allegheny Technologies' tungsten metals business is a testament to the company's commitment in achieving its goals.
The newly purchased business is one of the few companies in the world that can recycle tungsten. Through this acquisition, Kennametal will be able to reduce its material costs and increase its supply of the metal to boost sales in the future.
This company's spinoff could shine
Timken (TKR 1.53%) is another company playing the metal game well. The company manufactures mechanical components and high-performance steel, with particular expertise in metallurgy, mechanical power transmission, and friction management.
The company's board has decided to spin off its steel business in order to create two independent market-leading public companies. This would allow both of the companies to focus on their respective core markets and follow their own capital structure and allocation policies.
The steel company would benefit the most, because it has market leadership in the sale of seamless mechanical tubing and engineering bars. These products represent more than 70% of the company's revenues. The steel company is also attractive because its production is 100% made-to-order. The customized orders are usually large in size, helping the company achieve economies of scale.
Because of this, the steel spinoff could become a very attractive investment opportunity when the company splits.
Frictionless growth through bearings
When it comes to bearings, one familiar name is RBC Bearings (ROLL 1.15%), which has become a leading supplier of bearings to a wide range of end markets. The company leverages its sales on unique designs, brands, processes, and patents.
The company enters into long-term contractual agreements with its customers, helping it to predict its future cash flows with greater certainty. It also benefits from recurring aftermarket sales of its products. These aftermarket sales are important because they represent approximately 53% of the company's total revenues.
With its revenue streams secured to a larger extent, the company is focused on increasing its margins through programs aimed at reducing input costs. RBC has also been a successful acquirer with a strategy of acquiring small, undermanaged companies and transforming them into profitable subsidiaries.
Foolish takeaway
The metal industry is evolving and companies are becoming more focused than before. Kennametal and RBC are growth-oriented companies and their future prospects look bright. On the other hand, Timken's spinoff would represent a better investment opportunity than the new Timken company itself.
