Building Product Manufacturer Valuations – June 2022
The building products industry has experienced improving financial performance and growing valuations over the last several years. High customer demand, rising prices, and elevated merger and acquisition activity fueled this recent growth. However, valuations declined in 2022 as expectations of an economic contraction grew and investor sentiment toward the broad equity markets deteriorated. This article will examine some of the factors that appeared to impact the valuations of companies in the building product manufacturing industry.
This article updates our December 2021 analysis.
See also: Building Product Distributor Valuations – June 2022.
Important notes: This article examines potential driving factors for building product manufacturer valuations from a financial statement perspective. An actual business valuation requires an in-depth analysis of the business operations and associated risk factors that are not always evident from the data on financial statements. Also, this article will focus on what is typically perceived as primary value drivers to keep the length manageable. It will not touch on every observation in the data. Check out What is Value? and Risk and Return in the Market Approach for a quick read on the basics of risk and return and how they apply to this article.
The industry constituents for this analysis are listed below. The effective date of this analysis is June 30, 2022.
Figure 1 summarizes three items for the building product manufacturers:
- Market value of invested capital (“MVIC”) calculated as the sum of market capitalization and interest-bearing debt;
- Median revenues; and
- Median earnings before interest, taxes, depreciation, and amortization (“EBITDA”).
We notate the latest fiscal year as “LFY” (2021) and the latest 12 months as “LTM” (the latest available information as of June 30, 2022).
MVIC, revenue, and EBITDA for the industry constituents increased over the last four fiscal years, fueled by high demand for building products. In our previous analyses, we identified pricing inflation and merger and acquisition activity as having had a significant impact on growth through 2021:
- Federal Reserve Economic Data (“FRED”) reported hardware building materials and supplies retail prices to have increased over 60% between January 2020 and June 2021
- Increased merger and acquisition activity.
Since the end of 2021, there have been signs of cooling in demand. Truist releases a nice quarterly industry update on the building products industry. Per their Q1 2022 market update, supply chain capacity constraints have caused home building activity to slow. The ready availability of raw materials for building product manufacturers has also restricted these companies’ ability to meet demand. Furthermore, Truist believes that consumer demand for building products may also decline in light of interest rate increases, inflation, affordability, and geopolitical uncertainties. These headwinds will make it difficult for manufacturers and distributors to pass rising costs associated with production to price-weary consumers. Nevertheless, the ongoing housing shortage in the U.S. will likely mitigate a demand contraction for building products in the near future.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Revenue and EBITDA multiples declined sharply from the end of 2021 to June 2022, corresponding with increased uncertainty associated with the industry. Let’s dive into what appears to be influencing valuation multiples among the industry constituents.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 4 and 5 below summarize the consensus forecasts for each group. Next, we present a summary of the consensus forecasts for each group in Figures 4 and 5 below (note that “NFY” means next fiscal year; NFY = calendar 2022 for most companies).
The orange line in Figures 4 and 5 represents data as of June 30, 2021. The industry expected revenue and EBITDA to grow in the NFY (2021) and beyond. Actual results for 2021 met analyst expectations. However, current growth expectations for 2022 and 2023 appear to have declined somewhat from the growth rates projected in June 2021. Nonetheless, the industry is still expected to generate strong growth in the future.
We also looked to identify a relationship between growth and observed revenue and EBITDA multiples. Figures 6 and 7 present these relationships.
Figures 6 and 7 show that the lowest valuation multiples are associated with the lowest (or negative) projected growth rates. There are inconsistencies in the data, suggesting other factors likely impact these companies’ valuation multiples.
See also: Need to prepare financial statement projections? See A Practical Guide to Financial Statement Forecasts for Business Valuations.
The Size Story
Larger companies are generally perceived to have lower levels of risk relative to smaller companies. This dynamic can be due to several factors, including improved product or geographic diversification, deeper management teams, access to various distribution channels, and better availability of capital.
We present each company’s market capitalization plotted against its LTM revenue multiple in Figure 8.
As shown in Figure 8, there appeared to be some correlation between size and revenue multiples among companies with market capitalizations of less than $7 billion. However, there was significant dispersion in the data among the companies with the lowest LTM revenue multiples.
The Profitability Story
Revenue multiples are typically heavily influenced by profitability. We usually observe higher revenue multiples in companies with higher levels of profitability. In this case, LTM revenue multiples appeared correlated with margins projected for 2022. Figure 9 presents this correlation.
Based on the trend shown in Figure 9, the relationship between profitability and revenue multiples appears to stick for most companies in the group.
The Leverage Story
Debt usage tends to increase financial risk to equity holders. Debt holders have a senior position within a company’s capital structure, and debt servicing occurs before any cash flow benefits (i.e., dividends) are issued to equity holders – Figure 10 plots LTM revenue multiples against their associated debt to total capital ratios.
In Figure 10, there is some tendency for companies with higher debt to total capital ratios to trade at lower revenue multiples than their less leveraged counterparts. However, we noted significant dispersion within the observed data (particularly among companies with the lowest debt to total capital ratios), indicating that investors are likely considering other factors as they price companies in this sector. For example, UFP Industries had one of the lowest leverage ratios and traded at one of the lowest revenue multiples. This company ranked among the least profitable companies of the group and had some of the lowest projected growth rates, which likely had a more significant impact on how it was valued.
Tying it All Together
The trends observed in this article suggest that investors are considering multiple factors and that no single consideration is measurably impacting valuations. A summary of the observations in this article is presented below and compared to our analysis as of December 31, 2021.
The trends observed in this article suggest that growth, company size, profitability, and use of leverage all influence (to some degree) the valuations of publicly-traded building product manufacturers.
I hope you found this analysis helpful. Any input, feedback, suggestions, and questions (including disagreements with my high-level analysis) are welcome! Thanks for reading.
***
ValuAnalytics’ proprietary valuation analytics platform powered the quantitative industry analytics shown in this analysis. If you are a private equity firm looking to streamline your mark-to-market analyses at a cost-effective price or a business executive trying to benchmark your company against its peers, we are here to help. ValuAnalytics provides cost-effective, expert-level valuation analytics to give you the insight you need to make better-informed decisions around valuation. Click Request Service to get started.
