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Astec to Divest GEFCO, Simplify Organizational Structure

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Astec Industries, Inc. (ASTE - Free Report) recently announced that it is planning to sell its Enid, OK-based subsidiary, GEFCO, Inc.  This move will aid in simplifying organizational structure and strengthen financial position, and will enable the company to focus on core higher margin businesses.

GEFCO develops and manufactures reliable and safe drilling equipment and related products. Its wide range of products cater to a diverse set of industries including water well, environmental, groundwater monitoring, construction, mining, and oil and gas exploration.

GEFCO was acquired by Astec in 2011 and is currently one of the six business units in Astec’s Energy Group. The Energy Group contributed around 23% of Astec’s revenues in 2018. The GEFCO businesses contributed approximately $50 million to annualized revenues.

The GEFCO divestiture is anticipated to eliminate related annual operating losses and be accretive to Astec’s annualized earnings.  Management expects to close the deal by mid-2020.  The proceeds from the sale will be invested in future growth opportunities, which is in sync with Astec’s disciplined capital allocation process.

Astec has been witnessing sluggish demand for equipment and parts in all of its segments, particularly in domestic markets. This is concerning given that 80% of Astec’s sales are generated from domestic markets.

Owing to the late start to the construction season, few customers are utilizing existing equipment for the remainder of the construction season. While the nearly drought-free conditions across the country have impacted demand for water well drilling equipment, low oil prices led to lower demand for high pressure pump trailers and process seeders used in oil and gas production. On top of this, the company is facing input cost inflation particularly of steel thanks to the imposition of tariffs. This is denting the company’s margins.

Astec is consequently actively aligning business to meet demand. The company also introduced its strategy for profitable growth – Simplify, Focus and Grow. The implementation of the Sales and Operations Planning process will help the company in dealing with the changing market scenario.

The company remains committed to developing new products and all the three groups are poised to launch new or improved products, which will provide it a competitive edge over peers. Astec remains well poised in the long term backed by the global population growth, increased urbanization and the need to repair the ageing infrastructure.

Share Price Performance

Shares of Astec have gained 20.7% in the past year, compared with the industry’s rally of 15.0%.

Zacks Rank & Stocks to Consider

Astec currently carries a Zacks Rank #5 (Strong Sell).

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company (NWPX - Free Report) , Tennant Company (TNC - Free Report) and Sharps Compliance Corp (SMED - Free Report) . All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 50% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 43% over the past year.

Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 38%.

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