On Sep 27, we maintained our Neutral recommendation on leading road building equipment manufacturer and marketer Astec Industries Inc. (ASTE). Our reiteration was primarily based on growth in the wood pellet plant business, new products, pent up demand due to wet weather, pickup in construction and the 27-month highway bill. However, the positives may be offset by decline in backlog and margin headwinds.
Why Reiterated?
Astec Industries reported second-quarter 2013 earnings of 48 cents per share, up 17% from 41 cents in the year-earlier quarter. Total revenue increased 4% to $248.1 million from $238.3 million in the year-ago quarter.
High rainfall in many areas of the United States in the second quarter delayed construction work and equipment shipments as customers were not able to complete their site preparations for the equipment. About $15 million to $20 million of revenues were delayed and will be shipped in the third quarter.
Pent-up demand due to wet weather will benefit Astec through rest of the year. The 27-month highway bill will also continue to generate demand for Astec’s products.
Astec also continues to invest significantly in manufacturing new products as well as upgrading its existing products. New product introductions such as stabilizers, new models at Roadtec, larger crushers at Telsmith, pump trailers and vertical drilling rigs will meaningfully contribute to sales growth over the next 18-24 months.
The U.K. Parliament has approved a tax credit for utilities to burn wood pellets as a source of fuel and switch from coal fired plants to wood plants. This opens up a sizeable opportunity for Astec for further growth in the wood pellet plant business. Astec continues to receive new orders in addition to existing orders for wood pellet plants and these are expected to be significant contributors to its top line by the end of this year.
However, Astec’s total backlog at the end of the first half of fiscal 2013 stood at $241 million, down 6% year over year, reflecting the current weak and uncertain economic conditions. Management has thus guided third quarter results to be weaker than the second quarter.
Under absorption at Astec’s plants, where average utilization is about 70%, will continue to be a drag on margins. In order to reduce inventory, Astec will produce less in the third quarter compared with the second quarter. Margins are expected to continue to remain weak for the balance of the year, impacted by continued under absorption and a mix shift toward new products.
International sales (39% of its total revenue in 2012) declined 5% in the first half of fiscal 2013 mainly due to the negative impact of economic uncertainties in several of the countries in which the company markets its products. Since Astec has significant international exposure, it runs an added risk of facing an international market downturn.
Other Stocks to Consider
Other stocks in the industrial products sector with favorable Zacks Rank are Kubota Corp. (KUBTY), carrying a Zacks Rank #1 (Strong Buy), and Lonking Holdings Ltd. (LONKF) and Alamo Group, Inc. (ALG), both carrying a Zacks Rank #2 (Buy).
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