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On Nov 22, we downgraded our recommendation on leading road building equipment manufacturer and marketer, Astec Industries Inc. (ASTE - Analyst Report), to Underperform. Our view reflects the company’s weak third-quarter 2013 results.

Why the Downgrade?

On Oct 22, Astec reported third-quarter 2013 earnings of 28 cents per share, down 3.4% year over year. The earnings fell short of the Zacks Consensus Estimate of 37 cents. Total revenue also fell 2% year over year to $213.2 million, missing the Zacks Consensus Estimate of $236 million. The decline was primarily due to adverse weather and weak demand in the aggregate and mining group.

Astec’s domestic sales dropped 1% year over year to $132.4 million. International sales also went down 4% year over year to $80.8 million. Astec continues to experience narrowed international business, particularly in Canada.

More than 60% of Astec’s sales are driven by the global highway construction and reconstruction market. The uncertain future of highway funding made customers cautious regarding major equipment purchases, which will affect its performance.

In addition, gross margin contracted 20 basis points (bps) year over year to 21.5% in the quarter, affected by decreased overhead absorption. With a soft demand environment, gross margin will continue to be impacted by underabsorption.

Astec’s total backlog as of Sep 30, 2013, dipped 1% year over year to $228.5 million. Weaker backlog and uneven end-markets will hurt Astec’s performance. Headwinds also include adverse weather conditions, rising competition and ongoing economic uncertainties.

Following the release of the company’s third-quarter results, the respective Zacks Consensus Estimate for 2013 and 2014 decreased 11.8% to $1.65 and 12.1% to $1.96 a share. With earnings estimates for both 2013 and 2014 moving downward, Astec now holds a Zacks Rank #5 (Strong Sell).

Other Stocks to Consider

Other stocks in the industrial products sector with a favorable Zacks Rank are Xylem Inc. (XYL - Analyst Report) with a Zacks Rank #1 (Strong Buy) as well as Alamo Group, Inc. (ALG - Snapshot Report) and H&E Equipment Services Inc. (HEES - Snapshot Report) with a Zacks Rank #2 (Buy).

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