ASTE - Astec Industries: Operational Excellence As Sales Reach Record Levels

2023-08-29 14:22:34 ET

Summary

• Astec Industries Inc. achieved record net sales of over $350 million in the most recent quarter, indicating strong performance.
• The company is focused on returning earnings to shareholders and has a sound balance sheet, making it an attractive investment.
• Despite a decrease in backlog, Astec Industries has been able to convert it into net sales growth and has shown positive margin expansion.

Investment Summary

In the industrial sector, Astec Industries, Inc. ( ASTE ) has made its mark as it focuses on manufacturing equipment and components for road buildings and related construction activities. In the most recent quarter, the company managed to achieve record net sales of over $350 million, and ASTE trades at a TTM p/s of 0.86. I think that is fair to buy the company and bottom line margins are improving as well, which should bring more value to shareholders as dividends and buybacks can increase.

The company is increasing its focus on returning earnings to shareholders going forward, and I think this, together with organic margin expansion, is why ASTE is a buy rating from me. For investors that seek a diversified industrial business and one that has a sound balance sheet as well, then ASTE should be up there. They have a broad portfolio of equipment and components like asphalt storage tanks, hot oil heaters, and fuel storage tanks.

Backlog Resilience As Segments Perform Well

The backlogs for the company have been decreasing from the highs of $969 million back in Q3 of FY2022. During that period the interest rates were lower and the prospects of investments were still on the minds of a lot of construction companies. Since coming down though I don’t think ASTE is in any way in bad shape. As we know, the company is included in the industrial sector where it focuses on manufacturing road-building components and equipment. The demand is often somewhat cyclical as it tends to come and go depending on the economic health and whether or not companies are in a well-financed position to begin construction projects. With the backlog dropping it indicates that perhaps the market is going through a slump right now, but I think a recovery is not that far away. Industrial spending often comes in waves as when money is cheap, meaning when interest rates are low, the spending often increases, along with the demand for products and services that ASTE offers. Interest rates may stay elevated for some time, but are likely to come down eventually to stimulate economic growth in the US. It should be stated as well that the operations are divided into two various segments, those being Infrastructure Solutions and Materials Solutions.

The backlogs may be at $688 million currently, but ASTE has been able to convert this into net sales growth as it topped estimates and beat out previous records for the company. This is very reassuring and makes me think that ASTE still has a lot to provide investors in the shape of buybacks and dividends. The EBITDA margin expansion was largely due to growing volumes which have been outpacing the impact inflation has had on material costs and expenses. This is a very positive sign to see and a big reason in my opinion for the rise in the share price over the last few months.

Risks

As the company continues to grow and expand its operations, there arises the potential challenge of effectively managing its inventory to ensure a favorable impact on profit margins. This concern hinges on the possibility of encountering difficulties in clearing inventory without exerting undue pressure on its profit margins. For example, the inventories are at their highest level ever at over $429 million and so far the net margins have been improving to 1.83%. If demand lowers and ASTE is stuck with high inventory levels, it might transform into more of a liability instead and a cost.

Of particular significance is the concept of unabsorbed labor, which can significantly influence the company's gross profit and EBITDA margins if not managed proactively. Should the demand fail to surpass the company's existing production capacity, this unabsorbed labor could translate into tangible impacts on its financial performance.

In response to extended periods of suppressed profit margins and the consequent strain on cash flow generation, the company might opt to temporarily suspend or potentially terminate its ongoing share buyback initiative. The decision to engage in share buybacks is often contingent upon the company's ability to generate robust cash flows from its operations. What might cause this decrease in margins would be rising interest rates further and them being maintained at elevated levels for a prolonged period as well. This would put a constraint on ASTE as they have as of the last report around $62 million in long-term debts. The interest expenses have already been doubled in the last 12 months as opposed to 2022 and now are at $5.5 million. Seeing as the TTM net income is at $24.5 million, that is putting pressure on it for sure and might lead to less of an increase in coming buyback programs.

Financials

Looking at the balance sheet for the company I think it sits in a strong position, despite the long-term debts being somewhat high at $62 million. The cash position can efficiently cover at least 50% of this and that creates more flexibility for ASTE to make either acquisitions if they see fit or expand production capacity themselves. YTD the operating activities for the company have reached $2.5 million and where I am getting somewhat worried is the cash position decreased 34% since December 31, 2022. However, it should be stated that ASTE does have access to credits of $250 million from a revolving credit facility. But I think investors are wise to be worried about growing interest rates as it has been seen to impact the bottom line as stated in the risk segment above.

Valuation & Wrap Up

ASTE has grown well over the last few years and right now sits at a market cap of just over $1 billion. I find the valuation of the business to be justified given the recent performance of efficiently translating backlogs into margin expansions and outpacing the impact of inflation. The p/s sits below 1 which represents a discount of 37% to the sector. Looking at a peer like The Greenbrier Companies Inc ( GBX ) I still favor ASTE as the margins are better here which likely results in a slightly higher valuation as well. GBX has a net margin of just 1.43% whilst ASTE has 1.83%. Besides that, GBX also has quite bad FCF margins, which are a negative 4% currently. This is worse than ASTE and leads me to prefer them as opposed to GBX.

Looking at the earnings multiple though, it's just 15 on a forward basis, around 10% below the sector. Together it gives me enough of a margin of safety to be able to justify a buy rating for the company right now. In conclusion, I am rating ASTE a buy right now.

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