WNC - Astec Industries: Not The Road To Riches

Summary

• Astec Industries has a rather mixed and bumpy operating history covering an extended period of time.
• Recently, sales have risen nicely, but profits and cash flows have come under pressure.
• The stock is also not even close to being cheap, especially using data from the firm's 2022 fiscal year.

As of 2020, there were nearly 4.2 million miles of road in the US alone. That's up from the roughly 3.9 million miles that the country had back in 1990. Although this is a slow growth rate, it's also worth mentioning that a sizable portion of roads in the country are in either poor or mediocre condition. This can range from as little as 17% of all roads, as measured in miles, to as high as 73% in states like Connecticut and Illinois. So not only do we have the number of miles of road increasing over time, we also have a need for continued repairs to be made to those roads. One company dedicated to providing equipment and components necessary in the construction of roads, as well as for other related construction activities, is Astec Industries ( ASTE ). Unfortunately, from a fundamental perspective, the picture for the firm has not been great. Sales have been stuck in a fairly narrow range, while profits and cash flows, for the most part, have been as well. If shares of the company were trading on the cheap, I might argue that some nice upside could still exist. But given how ASTE stock is priced at the moment, the best rating I can give the company is a ‘hold’ to reflect my view that shares should generate upside that, at best, matches the broader market moving forward.

A bumpy road

According to the management team at Astec Industries, the company produces and sells equipment and components that are used primarily in road building and related construction activities. These are products that are marketed both domestically and internationally, primarily to asphalt producers, highway and heavy equipment contractors, utility contractors, sand and gravel producers, construction, demolition, recycle, and crushing contractors, and many other types of organizations. To best understand the company, we would be wise to break it up into its individual operating segments.

The first of these is the Infrastructure Solutions segment. Through this, the company produces and sells a complete line of asphalt plants, concrete plants, and their related components. They also produce ancillary equipment and help with the supplying of other heavy equipment to its customers. Specific equipment here includes vaporizers, concrete dust control systems, heaters, heat recovery units, asphalt storage tanks, fuel storage tanks, mailing machines, pump trailers, liquid terminals, and more. Five of the sites it controls are located in the continental US, while the remaining one outside of the country is located in Australia. Using data from the company's 2021 fiscal year, the most recent fiscal year for which an entire 12-month window is reported, 68.2% of the company's revenue and 64.4% of its profits came from this segment.

Next in line, we have the Materials Solutions segment. Through this, the company produces and sells heavy processing equipment such as crushing equipment, screening equipment, electrical control centers, plant automation products, portable plants, bulk material handling equipment, and more. All of these things that it produces are used in industrial activities that are similar to its road building work. On top of this, the company also provides servicing activities and it supplies parts for the aggregate, metallic mining, recycling, port, and bulk handling markets. Three of the nine facilities that the company has under this segment are located in the US. It also has operations in India, South Africa, Brazil, the UK, and Canada. Using data from 2021, this segment accounted for 31.8% of the company's revenue and for 35.6% of its profits.

Over the past five years for which we have complete fiscal year data, sales for the company have not really inspired. Between 2017 and 2020, revenue decreased year after year, falling from $1.18 billion to $1.02 billion. Then, in 2021, sales spiked a bit to just under $1.10 billion. On the bottom line, the picture for the company has also been somewhat problematic. Over the five-year window covered, the firm has seen no clear trend with profitability, with results ranging between a net loss of $60.4 million and a net profit of $46.9 million. Operating cash flow has also been rather volatile. Even if we adjust for changes in working capital, we don't see really much of a trend. In this case though, at least we see that, with the exception of the 2018 fiscal year, the metric ranged between a low of $62.7 million and a high of $93.6 million over the past five years. The same kind of outcome can be seen when looking at EBITDA as well.

For the 2022 fiscal year, the picture for the company did show some rather mixed results . On the positive side, revenue of $924.6 million came in 11.5% higher than the $828.9 million reported one year earlier. On a percentage basis, the real winner here was the Materials Solutions segment. Sales under this segment jumped 14.6%, climbing from $273.1 million to $312.9 million. This increase, management said, was driven largely by favorable net volumes, higher pricing, and a favorable product mix. These changes helped to push new equipment revenue up by $33.9 million, while parts and components sales grew by $8.1 million. It's also worth mentioning that the Infrastructure Solutions segment reported a respectable 9.6% rise in revenue, with sales going from $555.8 million to $609 million in response to favorable net volumes, higher pricing, and a change in product mix as well. New equipment sales, as a result, jumped by $29.5 million, while parts and component sales grew by $16.5 million. The company also benefited to the tune of $5.1 million from a rise in service and equipment installation revenue, plus it saw $3 million in additional sales thanks to freight activities.

On the bottom line, however, things could have been better. Net income plunged from $25.8 million to only $0.9 million. Most of that pain came from an 18.2% decline in profits under the Infrastructure Solutions segment. This, management said, was largely because of the impact that higher inflation had on materials, labor, and overhead costs. There were other issues as well, such as higher general and administrative costs, manufacturing efficiencies, and more. It's worth mentioning that the Materials Solutions segment reported a decline in profits of 4.1% during this time. The same factors that affected the Infrastructure Solutions segment also impacted the Materials Solutions segment during this time. Other profitability metrics sadly followed the same kind of path. Operating cash flow went from $27.3 million to negative $56.8 million. Even if we adjust for changes in working capital, the metric would have been sliced from $56.7 million to $25.6 million. Also on the decline was EBITDA. Year over year, this number dropped from $57.5 million to $48.4 million. These pains have not stopped the company from buying back stock though. During the third quarter alone, the company repurchased $6.1 million worth of stock, leaving $119.7 million worth of capacity on its books.

Unfortunately, management has not really provided any detailed guidance for the 2022 fiscal year as a whole. But if we annualize results experienced for the first nine months, we would expect adjusted operating cash flow of $29.8 million and EBITDA of $57.1 million. Based on this data, the firm is trading at a price to adjusted operating cash flow multiple of 33.4 and at an EV to EBITDA multiple of 17.2. If we use data from 2021 instead, these multiples would be a bit lower, coming in at 15.1 and 14.5, respectively. As part of my analysis, I also compared the company to five similar firms. On a price to operating cash flow basis, these companies ranged from a low of 5.5 to a high of 164.2. Four of the five firms were cheaper than our target. Meanwhile, using the EV to EBITDA approach, the range was from 6.5 to 21.1. In this case also, four of the five firms were cheaper than our prospect.

Takeaway

Given how shares are currently priced and the recent deterioration we have seen in operations, I was tempted to rate Astec Industries a ‘sell’, a rating that would reflect my belief that shares should underperform the broader market moving forward. Having said that, the rise in revenue is encouraging. But even more important is the fact that backlog came in during the third quarter of last year at $969 million. That's up substantially from the $620.5 million reported one year earlier. This helps to alleviate concerns that additional weakness might be around the corner. Even a return to the kind of profitability seen in 2021, however, would not make shares all that attractive to me. At best, I feel that a ‘hold’ rating is appropriate at this time.

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