TRG | The Bottom Line – 5/15

Einstein famously said that compound interest is the 8th wonder of the world. At Wednesday's virtual investor event, Astec laid out their long-term growth targets of organic sales CAGR of 6% and 25%+ CAGR of operating cash flow through 2030. This is supported by annual EBITDA margin expansion of 75-150 bps, which implies an EBITDA margin of 14-17% in 2030 (vs. 10% in FY’25).  Other key factors include: Astec targets part & service mix of 40-50% of total revenue (vs. 34% in FY’25 and ~33% in FY’23-24). Astec can create excess capital capacity of $400-600MM, which they hope can be deployed to accretive M&A. 

TRG Perspective – Amongst industrial stocks, there are not many companies that have the realistic potential to compound operating cash flow by 25% per annum for many years. We believe that Astec has trodden far down the transformation path. At this juncture of the journey, we see a compounding on already achieved success that enables greater aspirations. Investors who like the “infrastructure + reindustrialization theme” are looking at an opportunity set with many stocks that have already moved up significantly or companies who are already highly optimized. Astec is a beneficiary of these themes, but is in the early stages of optimization. We believe the current valuation is quite cheap (6.5x EV/EBITDA vs. our FY’27 estimate) and the EBITDA margin translation to high cash flow growth is a compelling story.

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