Agora Financial’s Rude Awakening

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Laguna Beach, California

• Seeking certainty amidst the kafuffle in the markets,
• An energy saving company with a “Double Barrel Green” kicker,
• Nuns on the runway, the church’s beauty within and plenty more… 

Eric Fry, reporting from Laguna Beach, California…

“Nuns deserve more attention than they get,” protests Father Antonio Rungi, an Italian priest.

Therefore, the protesting Padre has taken it upon himself to get nuns the attention that they deserve. Not ALL nuns, of course. Just the nuns who are the most deserving…like the young, smokin’ hot ones from Brazil. “Nuns are women above all else,” Rungi explains, “and beauty is a gift from God.”

Armed with this unassailable quasi-theology, Rungi has launched the “Sister Italia 2008″ beauty contest. “The contestants must be aged between 18 and 40, and can be either full members of an order or novices,” CathNews explains. “Father Rungi said he expected many of those who applied to be young, attractive and non-Italian.”

“If you’ve got it, flaunt it,” is not a phrase that anyone could locate in the New Testament. Nevertheless, this phrase seems to inspire Rungi’s ambitious proposal. While acknowledging that nuns possess both “physical and spiritual beauty,” Father Rungi’s pageant will focus only on the physical component of beauty. After all, Heaven already has a lock on the “inner beauty” franchise.

“Do you really think nuns are all wizened, funereal old ladies?” Rungi asks. “Today it’s not like that any more, thanks to an injection of youth and vitality brought to our country by foreign girls.” Rungi volunteers that some of the sisters from Africa and Latin America who were “really very, very pretty - the Brazilian girls above all.”

Your editor might take issue with Rungi’s theology, but he would not quarrel with Rungi’s marketing savvy. Rungi’s beauty contest might be the sexiest idea to come out of Rome since Vatican II. A contest that emphasizes physical beauty would be certain to draw interest from the world of non-believers…and don’t these folks comprise the target market of any brand-building exercise?

Even so, Rungi’s proposal has attracted widespread criticism. “The pageant is both sexist and theologically misguided,” the critics gripe. Rungi seems perplexed by the criticism. He explains that it was the nuns, themselves, who suggested the idea while helping him run his prayer services on the beaches of Naples. “Many have assured me they will take part,” he says. Besides, the man of the cloth explains, the contestants will remain fully clothed. They will not don bikinis or any other sort of skimpy attire.

In other words, Rungi’s beauty contest will keep a lot of the beauty under wraps. But even so, Rungi’s pageant is much less about the spirit than the flesh. And it is much, much less about inner beauty than outer beauty.

Granted, physical beauty is much easier to observe than inner beauty. (You can’t just tie a G-string onto inner beauty and ask it to strut down a runway). But physical beauty is a depreciating asset. Even in the flower of youth, it is slowly perishing. Inner beauty endures.

Physical beauty might inspire pageants, but inner beauty tends to inspire – and nourish –  longer-running events, like friendships and marriages…and successful investments.

Most of us understand these truths already…but most of us chase after physical beauty anyway. We chase after it wherever we encounter it, whether on the playgrounds of our youth or the financial markets of our later years.

Back in 2000, many of us chased after the beguiling beauties of the dot.com era. A few years after that, we chased after those drop-dead gorgeous homebuilding stocks. And soon after that, we chased after hotties like Countrywide, Bear Stearns and Fannie Mae. Maybe we were not so wrong to love these beautiful stocks, but we should have been asking ourselves some difficult questions along the way – questions like, “Is this beauty really as stunning as she seems, or am I merely blind to her faults?”

Physical beauty is easy to see. Inner beauty, by contrast, is easy to miss…even when you’re looking for it. That’s because it tends to reside among the world’s dispossessed. It tends to hide in ugly, out-of-the-way places.

But that’s exactly where Chris Mayer looks. Chris, who cranks out investment ideas on behalf of Capital & Crisis, excels at finding the beauties that others overlook. In the column below, he examines the alluring profile of a down-and-dirty road-building company.

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Asphalt…That’s Hot!
By Chris Mayer

Road building is a dirty business. Those big, heavy, loud, smoke-belching machines roll down the street announcing their presence like Hannibal’s war elephants. There is that unmistakable and potent smell that seems to penetrate walls. And that hot, sticky asphalt.

My street recently was repaved. It was quite an operation and went on for several weeks. The heat and smell from the machines was so intense that the poor trees along the street started to brown up a little at the edges, as if in protest.

It’s also energy-intensive work. Unless you have a brain the size of an aspirin, you know that “energy intensive” these days means “expensive as hell.”

So if you can figure out a way to do all this more efficiently, customers will gather around like a thirsty caravan at a desert oasis.

One company has figured it out. In fact, it is selling all it can make of its innovative new products. The CEO, Don Brock, so delighted with the way his new toys have taken off, calls the surge of buying “the green tsunami.”

His company’s “Double Barrel Green” system allows for making asphalt at much lower temperatures, which allows the contractor to use more recycled materials. The process also eliminates smoke and smell. And most importantly, it reduces fuel consumption by 14-20%. It even makes asphalt that lasts longer. Less expensive AND better!

“We believe this process will revolutionize the production of hot mix asphalt and become the industry standard over the next several years,” says Brock.Increasing the use of recycled asphalt nationwide from 15% currently to 50% would eliminate one week of imported oil per year (about 84 million barrels).

Reusing the asphalt on the roads also helps reduce the need for new aggregate, which is scarce in some areas - and very expensive to ship.

Brock’s company has many other innovative ideas. Another big one is a new rig that can drill oil and gas pockets with minimal disturbance to the surrounding area. As Brock says: “Approximately 43% of the oil in this country has been passed by because conventional drill rigs are unable to turn until they reach depths of 3,000-5,000 feet.” His new rig can turn at depths as shallow as 300 feet and then drill horizontally for up to a mile!

So you punch one hole in the ground and have a spoke-and-wheel pattern that can cover a 2-mile area from one spot. This is much more efficient than drilling 50 holes in the ground and constantly moving your rig. Plus, it takes only three, versus 20, days.

This is huge. And you know what it targets? The Marcellus Shale! In the last conference call, Brock talked about how “the hot area is that Marcellus Shale that goes from Indiana up to New York… It is pretty shallow gas up in that area. So there is a huge amount of drilling starting to go on in Pennsylvania, Ohio, in that area. Which is right where our plan is.”

Brock’s company is doubling its capacity to make these new rigs. It can’t make ‘em fast enough. In fact, Brock’s company is hopping in many areas. It’s not surprising to find that Brock’s company is basically in the sweet spot of the great infrastructure buildup…

Astec Industries (ASTE:nasdaq) is a collection of companies that make equipment for building and restoring infrastructure. They make big rock crushers and screening equipment for the mining and quarry industry. They make asphalt factories and components. They make equipment for asphalt paving and road building - trenchers, drillers and more. They also make machines that process wood and other plant waste to make mulch, compost and other products.

Don Brock founded the company in 1972. He is the largest shareholder, with 12% of the company. I love owner-operators, and we have a good one here. Brock has, over time, added over a dozen companies under the Astec banner.

The way he’s assembled this reminds me a bit of Warren Buffett.

Many of the businesses in Astec’s field are family-owned smaller companies. When the founder gets old and decides to sell his cherished creation, he wants Brock to buy his company. That’s because Brock keeps the integrity of the original company. He nurtures it, helps it grow. He doesn’t strip it down and wreck it. Business owners want to sell to Buffett for that same reason. As Buffett says:

You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever. Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.

Buffett is great, isn’t he? Never thought I’d see the word “boobs” in my letter, but there you go.

In any event, Astec Industries benefits from many of the trends we’ve talked about in these pages. The big one is the road building effort coming soon. I won’t spend too much time on that here, because I’ve written about it recently. (See letter No. 49, “The Crisis in America’s Roads”). Next year, the Highway Trust Fund will run out of money. I’d expect to see a nice big infrastructure package as part of the next president’s agenda.

Overseas Sales up 88%!

But this is bigger than a simple domestic road story. Astec is cooking overseas. In its most recent quarter, overall sales increased 22% - but international sales increased 88%! It was the most profitable quarter in the company’s history. Sales overseas were all over - Asia, South America, Russia, Central America, Australia and Canada. These sales make up 35% of the total. Astec also has a high-margin parts business that also grew 22% last quarter.

Of course, the weak dollar pitched in, but Astec also stepped up efforts to sell in these markets. Plus, the infrastructure build overseas is just mind-blowing - miles and miles of roads. But as I say, it’s more than just roads. Astec also follows the big pipeline projects, where its trenchers and other equipment come in handy. It benefits from the boom in mining and drilling and recycling and more.

You would think a company with so much in front of it would trade for a rich multiple. At least a premium to the overall market, right? Nope. Astec sold off after the past quarter, because the market wanted more! That gives us our opportunity.

At $34 per share, Astec trades for 11-12 times Brock’s estimate for earnings this year. That’s a steep discount to the rest of the market for a company that has a great shot at growing earnings at double-digit rates for years. Last October, the stock was $60.

Astec also generates solid cash flow - about $70 million, a healthy number compared with its $750 million market cap. Even after heavy capital spending in the business to boost capacity, Astec generated $33 million in free cash flow last year. That’s the kind of inner beauty that warms an investor’s heart.

[Joel's Note: Anyone burned by the fleeting beauty of toxic financials or skin-deep insurance companies ought to take a look at the portfolio Chris has amassed in his newsletter, Mayer’s Special Situations. Chris has loaded up on the kind of “nuts & bolts” companies that are more akin to lasting relationships than disappointing, one-night stands. While some of these companies have already shot to triple-digit gains, a few new additions are poised to move in the very near future.

If fundamentally sound companies with strong growth and old-school leadership are your bag, we’d invite you to check out Chris’ latest report right here. If not, there’s always the singles bar where the sexy investment banks hang out. Anyone?…Anyone?

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[Rude Endnote: Your morning kicks off with the Dow sitting precariously on 11,412.87. The manic index clawed back just under one-quarter of a percent yesterday after Monday’s selloff. Meanwhile, in the commodity pits, gold and oil still loom large. WTI crude is back up to $117 and gold has piled on about $11, threatening $840 an ounce as we write. 

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com