By:
Stephen Arcuri, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently
holds this position. This article was written by myself, and it expresses my
own opinions. I am not receiving compensation for it and I have no business
relationship with any company whose stock is mentioned in this article.
Summary
• Astec,
Industries (NASDAQ: ASTE) is
a global leader in the manufacturing of equipment and materials for asphalt
road building, aggregate processing, oil, gas and water well drilling and wood
processing, and other services. Astec offers over 220 products that help to
service infrastructure and construction firms through three segments: the
Infrastructure Group, the Aggregate & Mining Group, and the Energy Group.
The company is headquartered in Chattanooga, Tennessee.
• The Trump Administration’s failure to pass
an infrastructure plan is directly correlated with Astec’s falling stock price.
This looks more plausible post tax reform, but still remote.
• America’s deteriorating infrastructure will
provide a steady source of sales, but no near term catalyst.
Key points: The Trump
Administration originally listed a trillion dollar infrastructure spending bill
as one of their 100-day priority items. However, as the year has gone on and
the legislative agenda has stalled and the incremental revenues that investors
had priced in failed to materialize, Astec’s share price fell to a more
realistic level. Confusion over what the plan will eventually look like makes
pricing in any projects difficult. While Speaker Ryan proposed that for “every
$1 of federal dollars, there [would be] $40 of private sector spending,” the
President ruled out private-public partnerships.
Despite
the lack of a national spending plan, American infrastructure is in need an
upgrade; The American Society of Civil Engineers gave the United States a “D+”,
or failing grade in 2017. This grade has remained little changed for the last
16 years, however, so there is little reason to believe that this report will
have a meaningful change. While a real fix has yet to materialize, Astec is
poised to continue to provide products to the firms working on these types of
projects, and there is clearly enough work to be done.
What has the stock done lately?
Past Year Performance: Astec outperformed the Russell 2000 through
most of 2016 as both presidential candidates discussed trillion dollar
infrastructure plans that would have driven sales. Beginning in February, the realization
that the spending would be a lower priority for the Administration caused
prices to fall until they stabilized at their current price. A disappointing Q3
caused prices to fall almost 18% due to a disappointing quarter.
Source:
FactSet
My Takeaway
Astec’s industry positioning gives
them significant exposure to the kind of spending that would come out of an
infrastructure plan. While tax reform will be a tailwind, it will not provide
the same kind of price movement that sales growth would. Astec faces little
downside risk and little upside without a bill to sign. It is worth review
should the Administrations fiscal policies change in the coming months.
