TRG | The Bottom Line – 10/17

TRG initiated coverage of Astec Industries (ASTE) this week (report). Astec is an OEM with a focused “rock to road” strategy, producing equipment and aftermarket parts for asphalt and concrete plants, as well as equipment for crushing, screening, and conveying. Smaller end-markets include mining and forestry. 80% of sales are domestic. For many years, Astec was not optimally run, but the brand reputation and equipment capabilities were highly regarded in the industry. Also, importantly, Astec has very high domestic market share of asphalt plants, which makes them a road-spending beneficiary. More recently, the current management team is relatively new (CEO ~3 years, CFO ~1 year) and is focused on the right things – growing the parts (aftermarket) business which has higher margins, embedding technology into equipment, and M&A that enhances the core.

Our viewpoint is that Astec is already executing on these things. This makes Astec a transformation story to look more like high-performing OEMs, which have elevated margin and elevated multiples.

There is evidence of the transformation already underway: EBITDA margin profile (~8% in 2023-24, we forecast 10%+ in 2025-26), aftermarket contribution to total sales moving up to one-third of sales including the recently acquired TerraSource, and the early-stage efforts to embed more technology in its equipment to make raise pricing.

Top-performing OEMs generate ~20% EBITDA margin and garner ~20x EV/EBITDA on 2025-26 estimates. With Astec moving up to ~10% margin and selling for ~7-8x EV/EBITDA, we see the dual opportunity for expansion of both margin and multiple in the coming years.