Building Products Manufacturer Valuations – December 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 from December 2021 to December 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 appear to impact the valuations of companies in the building product manufacturing industry.

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 only sometimes 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 only touch on some observations 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 29, 2022.

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” (2021) and the latest 12 months as “LTM” (latest available information as of December 29, 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 the following factors as having had a significant impact on growth through 2021:

• 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.

Since the end of 2021, there have been signs of cooling demand. Truist releases a quarterly industry update on the building products industry. Per their Q3 2022 market update, residential new construction and “replace and remodel” activity has slowed. However, existing construction backlog and housing shortages are expected to limit the downside of the contraction. Furthermore, Truist believes that the downside of the current cycle will be reduced to a certain extent by aging millennials, who will support ongoing home buyer demand. This continual inflow of home buyers is unlikely to allow homebuilders to create enough supply to offset the current housing shortage in the near term.

In recent valuations we have completed at Helios Consulting, Inc., inflation has had a significant impact on expected financial performance for companies in the building products manufacturing and distribution space. Inflation, which drove up prices and revenue for the industry, is now crushing profit margins for some operators. Inventory accumulated over the last year at peak pricing sits on their balance sheets while the prices at which they can now sell that inventory have started to normalize. The decline in demand also means inventory will sit longer in warehouses, putting further strain on profit margins.

Valuation Multiples

Figures 2 and 3 provide a view of the historical trend in valuation multiples (revenue and EBITDA).