On Sep 27, we maintained our Neutral recommendation on leading
road building equipment manufacturer and marketer
Astec Industries Inc.
). 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
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.
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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
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
), carrying a Zacks Rank #1 (Strong Buy), and
Lonking Holdings Ltd.
Alamo Group, Inc.
), both carrying a Zacks Rank #2 (Buy).