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Neutral on Astec

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On Jun 7, we maintained our Neutral recommendation on leading manufacturer and marketer of road building equipment Astec Industries Inc. (ASTE - Free Report) . Our reiteration was primarily based on expected benefits from the recovery in construction as well as the new 27-month highway bill, growth in the wood pellet plant business, new products, new facility in Brazil and orders in the Asphalt segment, but may be offset by weak international sales and headwinds for the Underground segment.

Why Reiterated?

Astec reported a mixed first quarter. Total revenue dipped 2% year on year to $248 million, but first quarter earnings increased 10% to 57 cents.

The U.K. Parliament has approved a tax credit for utilities to burn wood pellets as a source of fuel and switch from coal fired plants to wood plants. This opens up a sizeable opportunity for Astec for further growth in the wood pellet plant business. Astec continues to receive new orders in addition to existing orders for wood pellet plants and these are expected to be significant contributors to its top line by the end of this year.

Astec Industries will benefit from the imminent recovery in residential and nonresidential construction in the United States. The new 27-month highway bill will also spark demand for Astec’s products.

Astec plans to invest around $20 million over the next two years in completing a manufacturing facility in Brazil, serving the Aggregates and Mining segment.  Once operational, this facility is expected to be able to support approximately $60 million in annual sales.

Astec also continues to invest significantly in manufacturing new products as well as upgrading its existing products. New product introductions such as stabilizers, new models at Roadtec, larger crushers at Telsmith, pump trailers and vertical drilling rigs will meaningfully contribute to sales growth over the next 18-24 months.

However, international sales declined 11% and international backlog dipped 6% year over year in the first quarter. Since Astec has significant international exposure, it runs an added risk of facing an international market downturn. Unless and until the market resumes, we do not see a major improvement in the demand for its products.

The Underground segment reported a loss of $2.4 million in the first quarter of 2013, wider than the year-ago quarter’s loss of $1.73 million. Decrease in margins at GEFCO, mainly due to inefficiencies and additional costs associated with the reorganization of its manufacturing facilities to implement lean manufacturing concepts, led to the loss. GEFCO’s difficulties in ramping production along with a soft oil & gas demand environment will continue to weigh on the segment’s results.

Other Stocks to Consider

Other stocks in the industrial products sector with a favorable Zacks Rank are Kubota Corporation with a Zacks Rank #1 (Strong Buy), and H&E Equipment Services Inc. (HEES - Free Report) , CNH Global NV , both carrying Zacks Rank #2 (Buy).

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