Building Products Manufacturer Valuations
The building products industry recently experienced a notable improvement in financial performance and valuations. 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 valuations of companies in the building product manufacturers.
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. We focused on publicly-traded companies in the United States that manufacture building products. Due to the large quantity of publicly-traded market in this broad space, this analysis will exclude companies focused on heating, ventilation, and air conditioning (“HVAC”) products. Companies selected for this analysis had to be traded on a major U.S. exchange for at least a year with a stock price equivalent of $1 or more as of June 30, 2021 (the effective date of this analysis).
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”).
The latest fiscal year is notated “LFY” (2020), while the latest 12 months is labeled “LTM” (latest available information as of June 30, 2021).
MVIC, revenue, and EBITDA for the industry constituents increased over the last three fiscal years and the LTM period. Most notable, however, was the acceleration of this growth in the LTM. This growth was universal among the public building products manufacturers. These trends are similar to those we identified for the publicly-traded building products distributors.
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.
Valuation Multiples
Figures 2 and 3 provide a view into the historical trend in valuation multiples (revenue and EBITDA).
Revenue and EBITDA multiples increased over the latest fiscal year and the LTM period as improvements in valuations outpaced growth in the industry’s financial metrics. These changes are consistent with the growth trends observed in Figure 1.
The Growth Story
Growth often has a strong influence on how companies are valued. Figures 4 and 5 below present a summary of the consensus forecasts for each group. Note that “NFY” means next fiscal year; NFY (blue line) = calendar 2021 for most companies, NFY (orange line) = calendar 2020 for most companies. “Current year” means June 30, 2021, while “prior year” means June 30, 2020.
In Figures 4 and 5, the orange line represents data as of June 30, 2020 – some of the worst months of the COVID-19 pandemic. The industry expected revenue and EBITDA declines in the NFY (2020) before returning to pre-pandemic levels. Actual results for 2020 significantly outperformed these expectations. As the blue line (current data) illustrates, the industry generated revenue and EBITDA growth in 2020. The industry expects growth to accelerate further in 2021 and 2022.
We also looked to identify meaningful relationships between growth and observed valuation multiples. We were unable to identify a correlation between growth and EBITDA multiples. However, LTM revenue multiples appeared to be correlated with revenue growth expectations in 2022. 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. The highest multiples seem to be associated with companies with the highest expected growth rates. There are certainly inconsistencies in the data, suggesting other factors impact valuation multiples for these companies.
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 were unable to identify a meaningful relationship between market capitalization and valuation multiples. However, there is some evidence that size still plays a role in how companies in the industry are valued. For instance, Trex Company has the highest projected growth rate and highest LTM revenue multiple (see Figure 6). Trex is also one of the largest companies analyzed 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 2022. Figure 7 presents this possible relationship.
Interestingly, Figure 7 looks a lot like Figure 6. The relationship between profitability and revenue multiples appears to apply to most of the companies in the group.
Tying it All Together
The trends observed in this article suggest that growth, company size, and profitability all influence (to some degree) the valuations of publicly-traded building product manufacturers. However, investors are likely also considering many non-financial considerations, such as:
- Product focus,
- Customer concentration,
- Merger and acquisition potential,
- Geographic and product diversification, and
- Financial leverage,
- Among other factors…
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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