ASTE - New Stock Pick - $24.71

Astec Industries, Inc. engages in the manufacture and marketing of road building equipment in the United States and internationally. It operates in four divisions: Asphalt, Aggregate and Mining, Mobile Asphalt Paving, and Underground.

I actually first started watching this one around $22 and initially jumped in at $23.50. But, I did not do my service to humanity and I did not post immediately as the burning bush told me to buy. But, that was like 2-3 trading days ago. Today, the stock closed at $24.71, up 5.15% on above average volume (330,000 shares vs. 3 month average of 231,000). A stock moving up on above average volume is a good thing...it typically indicates that there is more buying than selling.

This stock originally caught my attention when I noticed that on August 3, 2006, Tontine Capital Partners, which is run by Jeffrey Gendell, showed up on the insider transaction list. I know that name likely means nothing to you, but he is a tremendously successful investor and specializes in value investing. In short, he likes to buy companies when they appear to be grossly undervalued, at least in his opinion. And, at least for the positions he is required to report (owning more than 10% he has had tremendous success.

Mutual funds or independent investors typically do not like to buy more than 10% of the shares outstanding. This is because once you own 10% or more of a public company, you are required to report all of your buys and sells. This can get quite annoying and when trying to move large blocks of stock, really gives away your hand. If you own less than 10nd are not an officer or director, you can buy and sell freely without reporting. If you are a mutual fund and own less than 10%, you do have to report your position, but only every 3 months, and you do not have to disclose your individual transactions - just your overall position.

Anyway, the significance of the 10% issue is that Gendell sees a monster opportunity and not only went over the 10% mark, he continues to buy on the open market. He has reported purchases on 8/4, 8/7, 8/11, 8/17, 8/18, 8/31, and 9/1. I also would not be surprised to see that he bought more on 9/4 (today) since you have 2 trading days to report your purchases. Pretty sneaky on his part - as he bought last Thursday, but didn't tell anyone until after the market close today, allowing him to maybe pick up some more without showing his hand right away. In one month, he has bought 374,6000 shares from anywhere from $20.51-$23.58. Additionally, we have seen over 835,000 shares purchased by institutions and mutual funds during the 2nd Quarter of 2006....I am unsure how many of those are the responsibility of Gendell. We'll get a better take as to overall institutional buying come October when the funds report their 3rd Quarter activity.

Long story short.....more buyers than sellers = stock price goes up. And there is some smart money flowing into this stock.

On to the fundamentals. The company engages in the construction industry and is heaviliy involves producing industrial equipment for making, mixing, and working with asphalt cement and environmental remediation and control equipment.Both of these are huge markets and are growing.

Astec operates internationally and their product line is instrumental for the cement industry. The demand for cement is growing like crazy, both domestically and overseas, and ASTE can service both markets. This is further evidenced by the 5th largest cement company in the country and the largest American owned (this has implications), Ash Grove Cement investing over $160M in capital equipment to boost production in an Arkansas cement plant and to build a brand new plant in Nevada. Fortunately for me, Ash Grove Cement trades under the symbol ASHG and I am a long term holder and purchaser of ASHG for myself and my daughters. You can read more about ASHG in a previous blog of mine and in my stock picking group.

Anyway, back to ASTE.

ASTE is also involved in making equipment for emissions control and other environmental remediation processes. This is also a big industry and a big demand is present. There is growing national and international pressure for facilities, especially cement and asphalt facilities, to clean up their act. ASHG, for instance, is involved in many discussions about the high level of mercury emissions from their plants. Typically, ASHG just pays the fines associated with this, but there is growing pressure to address the cause of the problem and not just write checks. This environmental pressure should also play favorably into Astec's performance over the next 12-24 months.

Astec also has several other lines of business - www.astecindustries.com/companies/companies.htm

So, with all this being said, why ASTE? Aren't there other companies that make similar equipment and are in the same industry? Well, of course, but here are the facts.

1. I discussed the Gendell purchasing and track record above. That is certainly an important reason;

2. The financial metrics on this company are very attractive. There is no debt and ASTE trades at less than 1 times sales and less than 2 times book value. These are very attractive valuations. The company's sales and earnings continue to grow - 12% and 21% espectively year over year - and the company has a 14%+ return on equity. For a boring construction company, that is not bad.

3. The recent dip in the company's stock price. ASTE fell from a high of $42.25 in late April, 2006 to $19.95 just 3 months later. The reason? Despite posting 13.4%, 36.7%, and 38.2% gains in sales, net income, and backlog, respectively for the first 6 months 2006 vs. first 6 months 2005, the stock tanked 50%. Why? The company missed earnings estimates posted by the analysts. They were well off....20% less earnings than expected, but due to what the company called "certain negative events occurring at the end of the quarter that were beyond our control."

Overall, I expect demand for their products to be strong, the company to continue to post solid growth numbers for revenue and net income (at least over the next 2 years), and I expect the buying by Gendell to continue for a little while...maybe until the stock gets back to $30. These observations coupled with the apparent buying opportunity created by the stock price losing 50%+ of its value because of 'missing the estimates' should equate to a winner over the next few months and beyond. No promises, of course, but the facts look good.