There’s no question that the global economic slowdown is taking its toll on construction machinery makers.

Major players in this highly cyclical business include Caterpillar

(nyse: CATnews people ), Terex (nyse: TEXnews people ), and Manitowoc (nyse: MTWnews people ). Many stocks in this group have sold off sharply in recent months. One stock, however, has been notably resilient. It’s Astec Industries (nasdaq: ASTEnews people ), and according to the quantitative model employed by the Forbes Growth Investor, ASTE shares have tremendous upside potential, according to Samuel Ro at Forbes.com

Astec designs and manufactures machines used in building roads and highways. The company generated 63 percent of sales during the first nine months of 2008 in the United States, but international sales are growing more rapidly as emerging nations build out their infrastructure.

The aggregate and mining group, which accounted for 35 percent of sales, makes equipment for mining metals and processing aggregates and recycled materials. Products include crushers, vibrating feeders, inclined and horizontal screens, classifying and washing equipment, and conveyers. The asphalt group generated 26 percent of sales. It makes asphalt plants, heating and heat transfer equipment, storage tanks and related components.

The mobile asphalt paving group, which accounted for 17 percent of sales, makes pavers, material transfer vehicles, milling machines, reclaimers, soil stabilizers and screeds used to control the width and depth of applied asphalt. The underground group accounted for 14 percent of sales. It makes underground construction equipment such as trenchers, plows, directional drills, auger boring machines, down-hole tooling and rock saws. These products are used in constructing highway drainage systems and cutting irrigation ditches. They are also used to lay fiber-optic cable and utility lines. All other sales (8 percent) include whole-tree pulpwood chippers, horizontal grinders and blower trucks.

Sales had been growing strongly thanks to a worldwide infrastructure boom. However, growth has slowed due to the global economic recession. High steel costs pressured Astec’s margins, and high asphalt costs caused customers to trim purchases. Furthermore, high gasoline prices led to less driving, which crimped tax revenues and strained municipal budgets for road building projects.

ASTE realized some relief during the third quarter from moderating commodity prices, which descended from last summer’s record highs. Net sales in the quarter increased 15.1 percent year-over-year to $237.4 million. Domestic sales grew 2.7 percent to $135.3 million. International sales grew 37.1 percent to $102.2 million. The gross profit margin increased 122 basis points to 24.77 percent thanks to moderating steel costs. The operating profit margin improved 226 basis points to 10.33 percent. Net income jumped 37.9 percent to $15.96 million or 71 cents per share. Due to strong orders from abroad, backlog stood at $255.7 million, up 6.6 percent from the prior year.

Both theĀ United StatesĀ and China are spending tremendous amounts of money to stimulate their economies. Increased spending on infrastructure is a key element of the plans in both countries. We believe this spending could support ASTE’s order flow in the near term. We are also encouraged by the lack of debt on the company’s balance sheet. Not having to rely on the credit markets gives ASTE the flexibility it needs to navigate through near-term challenges. Prospects over the longer term look especially promising, particularly in geographic regions that will have to spend money to build roads to support their growing population and developing economies.

See Discussion, Leave A Comment