Astec has had an impressive run over the past six months. While the S&P 500 has been flat, the stock has returned 13% and now trades at $35.82. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Astec, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

We’re glad investors have benefited from the price increase, but we don't have much confidence in Astec. Here are three reasons why ASTE doesn't excite us and a stock we'd rather own.

Why Do We Think Astec Will Underperform?

Inventing the first ever double-barrel hot-mix asphalt plant, Astec (NASDAQ:ASTE) provides machines and equipment for building roads, processing raw materials, and producing concrete.

1. Long-Term Revenue Growth Disappoints

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Astec’s sales grew at a sluggish 2.2% compounded annual growth rate over the last five years. This was below our standards.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Astec’s revenue to rise by 3.5%. Although this projection implies its newer products and services will fuel better top-line performance, it is still below average for the sector.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Astec’s margin dropped by 12.1 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. Astec’s free cash flow margin for the trailing 12 months was breakeven.

Final Judgment

Astec falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 14× forward price-to-earnings (or $35.82 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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