Astec Upgraded to Neutral

We upgrade our recommendation to Neutral for Astec Industries Inc. (ASTE), which means the stock will perform mostly in line with the broader market. We believe President Obama’s recent announcement of a $50 billion plan to rebuild U.S. infrastructure bodes well for Astec and somewhat offsets the concerns regarding the lack of visibility of a renewal of the Highway Bill for the time being.

A large number of Astec’s customers depend substantially on government funding for highway construction and maintenance, along with other infrastructure projects. With no progress on the reauthorization of the highway bill, Astec Industries’ domestic customers have tightened their spending on capital equipment and are instead purchasing equipment needed for current jobs.

Further, fewer states are putting up projects for bidding, which has led to intense competition and margin pressure. We thus do not see any drivers in the domestic market until Congress renews the highway bill, which is not expected until 2011.

On a positive note, Astec is witnessing a pick-up in international sales. The company will, therefore, have to rely on international sales to combat the weak domestic results until there is development on this front. A significant recovery in the international markets along with a weak dollar could help the company offset most of the weakness in its domestic business and boost earnings.

Further, parts sales are also on the rise as instead of buying new equipment, customers are repairing their aging equipment to keep them operational. More wear and tear in the aging fleet will require replacement. A burgeoning replacement demand can support sales if the new highway bill is further delayed. Also, the lack of capital expenditures due to delays in the highway bill is creating pent-up demand, which should be beneficial to the company once the bill is passed.

On Labor Day, President Obama proposed a new $50 billion plan to be spent over six years to improve roads and other infrastructure in the U.S. The funding is intended for the reconstruction of 150,000 miles of road, the construction and maintenance of 4,000 miles of rail and the rehabilitation or reconstruction of 150 miles of runway, as well as the implementation of the NextGen air traffic control system. Once approved, we believe this will trigger asphalt plant/mobile paving equipment demand and prove beneficial for Astec Industries.

Astec Industries has a debt-free balance sheet and a current ratio of 3.7. The company generated $45 million of operating cash flows during the first half of fiscal 2010, compared with an outflow of $1.7 million in the year-ago period. As of the end of the second quarter, Astec Industries had cash and cash equivalents of $82 million.

We believe the company has plenty of ammunition to indulge in acquisitions. It can also increase its investments in emerging markets that are focused on infrastructure development such as Brazil.

Astec Industries delivered earnings per share of 45 cents in its second quarter ended June 30, 2010, up from 34 cents in the year-ago period. The company exceeded the Zacks Consensus Estimate of 39 cents. Increases in revenues, particularly international, and improved margins were instrumental in driving the better-than-expected results.

Revenues in the quarter were $209.2 million, an 11% jump from $188.8 million in the year-ago period. International revenues contributed 38% to total revenues in the quarter, up from 32% in the year-ago period. In dollar terms, international revenues were $80 million, a 34% improvement from the year-earlier period. Domestic revenues, however, remained flat at $129.2 million compared with the second quarter of fiscal 2009.

The Zacks Consensus Estimate for fiscal third-quarter 2010 earnings is 25 cents. For full year 2010 and 2011, the Zacks Consensus Estimates are, respectively, $1.27 per share and $1.63 per share.

Chattanooga, Tennessee-based Astec Industries is a leading manufacturer and marketer of road building equipment. The company sells equipment used in each phase of road building, from quarrying and crushing the aggregate to applying the asphalt.

Also, the company sells equipment and components unrelated to road construction, such as trenching, auger boring, directional drilling, industrial heat transfer equipment, whole-tree pulpwood chippers, horizontal grinders, and blower trucks. In addition to equipment sales, Astec manufactures and sells replacement parts for equipment in each of its product lines and replacement parts for some of its competitors’ equipment.

ASTEC INDS INC (ASTE): Free Stock Analysis Report

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