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Astec (ASTE) to Gain From Improving Markets Amid Cost Woes

Zacks Equity Research

On Jun 26, we issued an updated research report on Astec Industries, Inc. ASTE. The company will gain from strategic sourcing improvement initiative, favorable end markets, cost-structure optimization and capital-allocation strategy. However, input cost inflation owing to tariffs on imported steel will continue to hurt margins.

Let’s discuss these factors in detail.

New Strategic Sourcing Initiative to Yield Savings

Astec reported first-quarter 2019 earnings per share of 63 cents, a decline of 28% from the prior-year quarter. The company’s segments experienced pricing pressure from competitors in a tighter market and temporary weather related shutdowns at seven of the company’s subsidiaries, which impacted its ability to build and ship equipment. This in turn affected the company’s top and bottom line in the reported quarter. Moreover, at the quarter-end, Astec’s total backlog plunged 38% year over year to $380 million.

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 its gross margin in 2019 and free up $25 million in cash as a result of better inventory management. Additionally, the company is analyzing all areas of its business for opportunities of operational improvement.

The implementation of the new strategic sourcing initiative and improved inventory management will go on till July 2019. As a result of these initiatives, SG&A expenses will be higher during the period.

For 2019, Astec anticipates revenues will be flat to up 3% from adjusted revenues of $1.246 billion in 2018. Earnings per share for 2019 is expected to lie between $2.25 and $2.55. The company had reported earnings per share of $2.92 in 2018.

The Zacks Consensus Estimate for fiscal 2019 is currently pegged at $2.34, indicating year-over-year decline of 19.86%.

Improving Markets, Part Sales to Boost Growth

Going forward, improving mining and construction markets and higher infrastructure spending will bolster Astec’s revenues. The company continues its efforts to grow international business by increasing presence in the markets served and opening of company-owned distributors. Astec remains well poised in the long term backed by the global population growth, increased urbanization and the need to repair the ageing infrastructure.

Part sales were 28.4% of total sales in the first quarter of 2019 compared with 27.1% reported in the prior-year quarter. Part sales improved 5% on a year-over-year basis in the first quarter of 2019. 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 582,000 shares for approximately $24 million during 2018. No share repurchases were made in the first quarter of 2019. The company has 125,851 shares remaining authorized for repurchase. The other two areas for capital allocation for the company remain acquisitions and capital expenditures.

Higher Costs to Hamper Astec’s Margins

Astec utilizes steel as a major raw material to manufacture products. The company is facing input cost inflation, particularly for steel owing to the imposition of tariffs. Given the competition, it might not be possible for Astec to raise prices to counter the ram material cost inflation.

Share Price Performance

Shares of Astec have plunged 46.4% in the past year, compared with the industry’s decline of 3.9%.

Zacks Rank & Stocks to Consider

Astec currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are The Timken Company TKR, Casella Waste Systems, Inc. CWST and Harsco Corporation HSC, each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Timken Company has an estimated earnings growth rate of 26.6% for the ongoing year. The company’s shares have gained 16% in the past year.

Casella Waste Systemshas an expected earnings growth rate of 31.97% for the current year. The stock has appreciated 47.7% in a year’s time.

Harsco has a projected earnings growth rate of 9.1% for 2019. The company’s shares have rallied 21.2% over the past year.

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