Focus Picks: Astec Industries (ASTE) & Tempur Sealy (TPX)

Astec Industries (ASTE)   In the 3-month period ending February, ASTE has posted gains in 9 of the past 10 years, generating a 11.21% average return and a 11.61% median return. ASTE's standard deviation is 13.20% in the period and its correlation to the SPY is 0.36.   Post-recession spending on roadways remains tight, however opportunity increases as spending on commercial projects climbs and municipal budgets ease.   38% of its sales come from its aggregate and mining business.  25% comes from asphalt and another 17% comes from paving.   As a result, 60% of its revenue is tied to infrastructure spending.  Through the first nine months sales have been relatively flat, totaling $709 million versus $708.6 million last year.  Despite the slight increase, tight cost controls helped SG&A fall to $114.7 million from $117 million.  Domestic sales for the first nine months are up 3%, while international sales, which account for roughly 40% of sales, are down 5%.  Earnings per share for the period grew 8% YoY to $1.33.  The company continues to gain traction with its plan to boost higher margin parts sales.  Sales of parts climbed 8.4% YoY in the third quarter, representing nearly 28% of total revenue.  For comparison, parts represented 21% of sales in 2008.   The company believes it can boost revenue in mining and energy to each represent 30% of sales over the coming three to five years, up from 20% each currently.   The wildcards for Astec remain whether Eurozone recovery will spark rising demand for mining and whether U.S. growth can further accelerate and support municipal and state budgets, which will drive contractor demand.  If so, Astec is positioned for operating margin leverage given capacity is running around 65%-70%.  If utilization can move higher, there remains significant profit potential given current operating margins are running 5.6%, which is well below the pre-recession peak near 10%.  That may suggest upside to current FY16 analyst expectations of $2.51 per share. Astec pays a $0.10 quarterly dividend, giving it a forward yield of 1.1%. Symbol Price Volume Avg Vol P/E Mkt Cap PEG Ratio ASTE 37.63 93,282 63,178 21.22 859.96M N/A Price/Book % 52-Wk High % 200-Day MA Short Ratio EPS Next Yr EPS Curr Yr %  50-Day MA 1.52 -1.88% 6.44% 8.2 1.94 1.65 5.44%   November Investor Presentation Q3 Earnings Transcript Tempur Sealy (TPX)   In the 3-month period ending February, TPX has posted gains in 8 of the past 10 years, generating a 15.72% average return and a 24.77% median return. TPX's standard deviation is 34.53% in the period and its correlation to the SPY is 0.84.   Tempur acquired Sealy this past March, doubling the company's revenue and creating the biggest player in bedding.   Total U.S. bedding industry sales were $6.8 billion in 2012, just shy of the 20 year peak of $6.9 billion in 2007 and well above the $5.7 billion recessionary low in 2009.  U.S. mattress sales of $5.5 billion in 2012 eclipsed the 2007 peak of $5.3 billion, despite unit volume remaining significantly below the peak in 2005.  That's because higher price/margin specialty sales are growing more quickly than traditional innerspring.  As a result, average wholesale unit prices have climbed to $278 from $239 in 2010.  Importantly, Tempur's price points in the above $2k market have climbed while the average industry price in that price point has fallen.  The total global market for mattresses has climbed a compounded 8% since 2002, reaching $21.1 billion.  Growth in Asia has run a compounded annual 16%, far outpacing the 3% annual growth in Europe.   Rest of World sales has grown a compounded 11%.  However, TPX's wholly owned sales growth has been faster, with Asia up 39.5% compounded annually from 2009-2012 to $100 million.  TPX estimates the Asia market is worth $7 billion, providing significant opportunity for expansion.  In the third quarter, combined sales were up 111% to $735 million thanks to the Sealy acquisition.   The combined company's adjusted earnings per share totaled $0.73 in the third quarter, up from $0.70 last year.  As expected, integrating lower-margin Sealy products dropped gross margin to 40.6% from 49.2% last year.  Tempur international sales fell 3.6% to $103 million on a 4.7% drop in bedding sales.  Sales were weakest in Europe, suggesting a recovery there could remove an important headwind in 2014.  Offsetting that weakness was a 0.6% improvement in Tempur North American sales to $242 million, led by non-bedding sales growth of 4.8% to $21.8 million. Global direct sales are also improving, increasing to $31.5 million from $27.1 million last year.  Total sales of Sealy products were just shy of $390 million in the quarter.  For the full year, TPX is guiding for $2.425-$2.45 billion in sales and $2.25-$2.40 in adjusted EPS.   Over the coming three years, TPX is guiding for top line CAGR of 6% with growth approaching double digits exiting 2016.  TPX estimates annual synergies from its Sealy acquisition will reach $70 million in 2016 and total $100 million longer term.  As a result, the company estimates a CAGR in EPS of 15% through 2016, reaching $4.00+.   At the same time, growth will allow the company to reduce leverage to 2.5x by the end of the period, down from 4.5x.  Symbol Price Volume Avg Vol P/E Mkt Cap PEG Ratio TPX 53.31 426,823 1,287,820 43.8 3.2245B 1.69 Price/Book % 52-Wk High % 200-Day MA Short Ratio EPS Next Yr EPS Curr Yr %  50-Day MA 39.18 -1.51% 22.49% 5 2.88 2.34 7.55%     Corporate Presentation Company's Q3 EPS transcript