On Jun 7, we maintained our Neutral recommendation on leading
manufacturer and marketer of road building equipment
Astec Industries Inc.
). Our reiteration was primarily based on expected benefits from
the recovery in construction as well as the new 27-month highway
bill, growth in the wood pellet plant business, new products, new
facility in Brazil and orders in the Asphalt segment, but may be
offset by weak international sales and headwinds for the
Astec reported a mixed first quarter. Total revenue dipped 2%
year on year to $248 million, but first quarter earnings
increased 10% to 57 cents.
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.
Astec Industries will benefit from the imminent recovery in
residential and nonresidential construction in the United States.
The new 27-month highway bill will also spark demand for Astec's
Astec plans to invest around $20 million over the next two years
in completing a manufacturing facility in Brazil, serving the
Aggregates and Mining segment. Once operational, this
facility is expected to be able to support approximately $60
million in annual sales.
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
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However, international sales declined 11% and international
backlog dipped 6% year over year in the first quarter. Since
Astec has significant international exposure, it runs an added
risk of facing an international market downturn. Unless and until
the market resumes, we do not see a major improvement in the
demand for its products.
The Underground segment reported a loss of $2.4 million in the
first quarter of 2013, wider than the year-ago quarter's loss of
$1.73 million. Decrease in margins at GEFCO, mainly due to
inefficiencies and additional costs associated with the
reorganization of its manufacturing facilities to implement lean
manufacturing concepts, led to the loss. GEFCO's difficulties in
ramping production along with a soft oil & gas demand
environment will continue to weigh on the segment's results.
Other Stocks to Consider
Other stocks in the industrial products sector with a favorable
Zacks Rank are
) with a Zacks Rank #1 (Strong Buy), and
H&E Equipment Services Inc.
CNH Global NV
), both carrying Zacks Rank #2 (Buy).