One of the best ways to find promising stocks is by identifying firms that have outperformed the industry during periods of weakness. And the COVID-19 pandemic turned out to be a textbook for this exercise.
As a perfect example, manufacturing was one of the worst affected sectors during the global lockdown. And yet, Astec Industries, Inc. (NASDAQ: ASTE) stock recorded a year-to-date growth of 36%, massively outperforming the 3.5% growth achieved by the construction and mining industry.
Financials
The market optimism was based on an 81% jump in adjusted earnings during the second quarter, way better than what analysts had expected. This came despite a 13% decrease in net sales due to disruptions in client operations. In an interview with AlphaStreet, Astec Industries CEO Barry Ruffalo attributed the earnings growth to the restructuring activities and streamlining of the business.
“We went from 16 independent companies to two groups – infrastructure solutions and material solutions. We are using the group structure to leverage our ability to sell across our customer base and take more market share. We now know through survey and data analysis that 60-70% of our asphalt plant customers are also our concrete plant customers.”
The strong run in the bourse over the COVID period was also likely to have been spurred by low levels of debt and a balance sheet that is stronger than most of its peers, a factor that investors take into consideration during turbulent times. A small uptick in backlog at the end of July could also be the cue to the beginning of a recovery.
The manufacturer of equipment for asphalt road building and aggregate processing has also been actively divesting underperforming units and acquiring firms that complement its line of offering. Earlier this quarter, Astec had announced the acquisition of two concrete batch plant manufacturers – CON-E-CO and BMH – both of which will fall under the Infrastructure Solutions division.
Separately, the addition of a new Chief Information Officer was aimed at investing in IT tools that can help with product development and streamlining of operations.
Outlook
Speaking on the impact of the presidential elections on the firm’s outlook, CEO Ruffalo voiced confidence, stating that both the Republicans and the Democrats see infrastructure as a top priority. This could strengthen Astec’s growth drivers into 2021 and beyond, he said.
“Our customers had a record year in 2019. Many of them expect to have a stronger year in 2020, even with COVID. And now that we have a 12-month extension on the FAST (Fixing America’s Surface Transportation) Act, this gives our customers more confidence to know that their backlog, which typically takes them into 2021, will have some support from that extension. And so we expect the market drivers will continue to be very strong from that.”
Value creation
While share buybacks are not in consideration at the moment, the executive said the focus is on driving ROI and free cash flow. He added that the management hopes to see its free cash flow conversion to be greater than 100% of net income.
Meanwhile, the Chattanooga, Tennessee-based firm would continue to pay dividends to its shareholders.
“We have long term financial metrics, where we want to grow the company 5-10% — 5% organically and 10% when you add an acquisition. We want to have a margin that’s greater than 12% and EPS growth greater than 10%. We want to grow the company in a way where there’s value creation that flows even to a greater level.”
As of October 8, ASTE stock was trading at a 0.8% downside from its 12-month average price target.
(Written by Arjun Vijay)
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Interested to learn more about Astec Industries? Read the latest earnings call transcript here.