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Improving Construction Markets to Aid Astec, Tariffs a Woe

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On Dec 26, we issued an updated research report on Astec Industries, Inc. (ASTE - Free Report) . The company  will benefit from cost-structure optimization, focus on capital-allocation strategy, higher infrastructure spending and improving construction markets. However, input cost inflation owing to tariffs on imported steel remains a headwind.
 
Let’s discuss these factors in detail.
 
Weak 4Q Ahead
 
Gross margin in third-quarter 2018 was 22.7%, impacted primarily by volume and absorption and lower sales. Though the company maintains its target of attaining 25% gross margin in the fourth quarter this year, it will be a challenge considering its product mix. For the fourth quarter of 2018, Astec anticipates revenues to be in line with prior-year quarter. Earnings per share in the fourth quarter will be slightly higher than fourth-quarter 2017. The company trimmed core sales growth guidance to 1% to 3% for fiscal 2018 from previous guidance of 7-12%.
 
Infrastructure Group’s Backlog to Pick Up
 
At third-quarter end, Astec’s total backlog declined around 20% year over year to $309 million, weighed down by the 48% plunge in the Infrastructure Group’s backlog. Orders were down in the Infrastructure Group as customers experienced high work levels which led to a slower order intake for Astec. Nevertheless, the company noted improvement in order activity since the end of the third quarter. Going forward, improving mining and construction markets and higher infrastructure spending will boost the Group’s revenues. Astec remains well poised in the long term backed by the global population growth, increased urbanization and the need to repair the ageing infrastructure.
 
In the Aggregate and Mining Group, backlog improved as the group experienced strong order intake primarily due to strong economic activity in the United States. The Energy Group experienced good order intake for products serving customers in the industries of construction, industrial, oil and gas leading to improved backlog. The company also witnessed strong quoting activity for oil and gas drilling products during the quarter. 
 
Part Sales to Boost Top-line Growth
 
Part sales were 27.6% of year-to-date total sales in the third quarter compared with 24.5% reported in prior-year comparable period. Astec remains committed toward improvement of its part sales volume over the long term. It also intends to improve competitive part sales and service sales. Majority of its customers in the United States have been experiencing a stable product market, and the company remains focused on selling existing and new products.
 
Cost Optimization, Capital-Allocation Strategy to Assist Growth
 
Astec will benefit from cost-structure optimization and focus on capital-allocation strategy. The company hiked dividend by 10%, and also announced a new share repurchase plan of up to $150 million worth of its shares. Notably, the company repurchased 297,000 shares for approximately $14 million during the third quarter of 2018. The other two areas for capital allocation for the company remain acquisitions and capital expenditures.
 
New Strategic Sourcing Initiative to Yield Savings
 
Astec has engaged a consulting firm to help analyze opportunities to improve the company. Per the results of the review, there are opportunities to improve strategic sourcing and inventory management. The company anticipates savings from strategic sourcing improvement to add approximately 2% to gross margin in 2019 and free up $25 million in cash as a result of better inventory management. Additionally, Astec is analyzing all areas of its business for opportunities of operational improvement.
 
However, the implementation of the new strategic sourcing initiative and improved inventory management will go on till July 2019 consequently leading to flared SG&A expenses during the period.
 
Steel Tariff to Hamper Astec’s Margins
 
Astec utilizes steel as a major raw material to manufacture products. The company is facing input cost inflation, particularly of steel owing to the imposition of tariffs. Given the competition, it might not be possible for Astec to raise prices to combat the ram material cost inflation.
 
Share Price Performance
 
 
Shares of Astec have plunged 47.5% in the past year, compared with the industry’s decline of 24%.
 
Zacks Rank & Stocks to Consider
 
Astec currently carries a Zacks Rank #3 (Hold).
 
Some better-ranked stocks in the same sector are DMC Global Inc. (BOOM - Free Report) , CECO Environmental Corp. (CECE - Free Report) and Northwest Pipe Company (NWPX - Free Report) . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
DMC Global has a long-term earnings growth rate of 20%. The stock has gained around 44% in a year’s time.
 
CECO has a long-term earnings growth rate of 15%. Its shares have surged 34% in the past year.
 
Northwest Pipe has a long-term earnings growth rate of 10%. The company’s shares have been up 19% during the past year.
 
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