Building Products Manufacturer Valuations – December 2021 Update
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. This article will examine some of the factors that appeared to impact the valuations of companies in the building product manufacturing industry as of the end of 2021.
This article updates our June 30, 2021 analysis.
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, to keep the length manageable, this article will focus on what are typically perceived to be primary value drivers. 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 December 31, 2021.
Figure 1 summarizes three items for the building products 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” (2020), and the latest 12 months as “LTM” (latest available information as of December 31, 2021).
MVIC, revenue, and EBITDA for the industry constituents increased over the last three fiscal years and the LTM period. This growth was nearly universal among the public building products manufacturers.
As noted in our analysis of the building products distribution industry, growth among building products companies comprised a combination of:
- High demand for building products, particularly lumber, driven by the residential real estate markets;
- Product price increases – for example, Federal Reserve Economic Data (“FRED”) reported hardware building materials and supplies retail prices to have increased over 60% between January 2020 and June 2021; and
- Increased merger and acquisition activity.
Some indications point to this strong demand for building products continuing into 2022. The recent infrastructure bill, improving construction starts, and consolidation among market participants are all likely to drive investor interest in this sector.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
The median revenue multiples grew in the latest fiscal year but stagnated in the LTM period. On the other hand, the median EBITDA multiples increased consistently over the last several fiscal years. Let’s look at what appears to be impacting the multiples now.
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 2021 for most companies).
In Figures 4 and 5, the orange line represents data as of December 31, 2020. The industry expected revenue and EBITDA to grow in the NFY (2020). Actual results for 2020 significantly outperformed these expectations. As the blue line (current data) illustrates, the industry expects growth to accelerate further in 2021 and 2022.
We also looked to identify a relationship between growth and observed revenue and EBITDA multiples. We were unable to identify a correlation between revenue growth and revenue multiples. However, EBITDA multiples appeared to be somewhat correlated with EBITDA growth expectations. Figure 6 presents this relationship.
In Figure 6, we observe that the lowest valuation multiples are associated with the lowest (or negative) projected growth rates. There are certainly inconsistencies in the data, suggesting other factors may be impacting valuation multiples for these companies.
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 7.
As shown in Figure 7, there is significant dispersion in the multiples when comparing on the basis of size. Nevertheless, we observed some clustering of multiples among companies with market capitalizations of less than $4 billion and companies with market capitalizations ranging between $5 billion and $8 billion. The inconsistency in the multiples in relation to company size would suggest that investors may be placing greater consideration on other factors, as discussed in this article.
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 2021. Figure 8 presents this possible relationship.
Based on the trend shown in Figure 8, the relationship between profitability and revenue multiples appears to stick for most of the companies in the group.
The Leverage Story (***New***)
New to this update, we consider the impact of financial leverage (or the companies’ use of debt) and their impact on the valuation multiples. In the last year, we have noticed an increasing trend of risk mitigation among investors, both in the private and public markets. Therefore, we have included financial leverage among the considerations we analyze to explain the observed valuation multiples.
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 9 plots LTM EBITDA multiples against their associated debt to total capital ratios.
In Figure 9, there is some tendency for companies with higher debt to total capital ratios to trade at lower EBITDA multiples than their less leveraged counterparts. However, we noted significant dispersion within the observed data, indicating that investors may be considering other factors as they determine pricing for companies in this sector.
Tying it All Together
The trends observed in this article suggest that investors are considering multiple factors and that no single consideration is single-handedly determining how companies in the building product manufacturing industry are valued. A summary of the observations in this article is presented below and compared to our analysis as of June 30, 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.
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