Astec Poised at Neutral

We reiterate our Neutral recommendation on Astec Industries Inc. ( ASTE - Analyst Report ) following our assessment of its first-quarter 2012 results. The company’s earnings of 53 cents per share increased 20% year-over-year, but were below the Zacks Consensus Estimate of 61 cents. Total revenues increased 16% year over year to $266.6 million, lagging behind the Zacks Consensus Estimate of $273 million.

Parts sales in the reported quarter increased 33% year over year to $76 million (about 28.5% of total sales), indicating that customers are repairing their aging equipment to keep them operational instead of buying new materials. Demand for parts increases with more wear and tear.

The Underground segment performed well in the reported quarter, driven by the acquisition of GEFCO in 2011 (which contributed in the range of $14-$15 million in the reported quarter) along with introducing new products. Moreover, orders for large trenchers have started to pour in, which will benefit the segment moving ahead.

Astec invested significantly in manufacturing new products as well as upgrading its existing products in 2011. In the reported quarter, each model in the mobile equipment required a major redesign for transforming them to Tier 4 from Tier 3. These products, once redesigned, will benefit the company moving forward.

However, the company may face margin headwinds in the upcoming quarters from the soaring costs related to the transition of Tier 4i engines, new product launches along with orders for the wood pellet plant.

Moreover, most of Astec’s customers depend on government funding for the construction and maintenance of the infrastructural projects. The buyers have tightened their budgets, driven by the uncertainty regarding the new highway bill. The bill has just been extended for the ninth time instead of formulating a new one.

The economic slowdown has hurt the demand for Astec’s products. Since the company has significant international exposure, it runs an added risk of facing an international market downturn. Unless and until the market reverts to its former position, we do not see a major improvement in the demand for its products.

Astec faces competition from companies like Caterpillar Inc. ( CAT - Analyst Report ) and Gencor Industries Inc. ( GENC ) . Our recommendation on the stock is in line with a short-term Zacks #3 Rank (Hold).