Over the past six months, Astec has been a great trade, beating the S&P 500 by 9.1%. Its stock price has climbed to $40.02, representing a healthy 14.5% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Astec, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Astec Will Underperform?
Despite the momentum, we're cautious about Astec. Here are three reasons why ASTE doesn't excite us and a stock we'd rather own.
1. Backlog Declines as Orders Drop
We can better understand Construction Machinery companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Astec’s future revenue streams.
Astec’s backlog came in at $402.6 million in the latest quarter, and it averaged 28.1% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Astec’s revenue to rise by 3.5%. Although this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Astec’s margin dropped by 8.1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Astec’s free cash flow margin for the trailing 12 months was 5.4%.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Astec, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 14.2× forward P/E (or $40.02 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. Let us point you toward our favorite semiconductor picks and shovels play.
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