2018 construction materials market outlook

FMI Capital Advisors’ George Reddin. Photo by PamElla Lee

George Reddin, a managing director with FMI Capital Advisors, offered a look at trends and the current climate for construction materials merger and acquisition activity during a presentation at this year’s Pit & Quarry Roundtable & Conference.

Reddin, who is a regular speaker at the P&Q event, detailed why the market conditions for buying and selling construction materials businesses today are among the best the industry has seen in a decade.

The evidence is in the numbers according to Reddin, who points to factors such as residential construction improvements, a highway bill (the FAST Act) that’s provided a boost to roads and highways, low interest rates and inflation, and strides made in unemployment.

The outlook for construction materials M&A activity also remains positive because leverage ratios for traditional buyers have dropped, margins and valuations have improved, and the United States is back in favor relative to other global opportunities, Reddin says.

The election of Donald Trump as president and the potential for something to get done on infrastructure at the federal level are other contributing factors to the current environment surrounding M&A activity, he says.

According to Reddin, part of the president’s federal infrastructure plan would be used to reward states and localities that raise taxes or other revenue to fund infrastructure in their jurisdictions. The White House is also looking at grants for new projects in rural areas and money for transformational work, including plans to build tunnels for high-speed trains.

Meanwhile, as the president’s plan is considered, state and local transportation funding is on the rise. According to Reddin, at least 31 states have approved plans to raise additional transportation revenues since 2012.

The new tax law will have positive effects on M&A activity, as well. The law will encourage more transactions and may lead to higher valuations, Reddin says. Now, buyers get to deduct the purchase price allocated to equipment the year they acquired it, further sheltering taxable incomes.

Yet another reason for optimism: FMI continues to forecast a 5 percent increase in total construction spending over 2017. Primary growth segments for 2018 will be residential, commercial, lodging and office. FMI forecasts growth of more than 5 percent for these segments.

Evidence in numbers

1. A bull market is forecasted to end in 2018. According to a Bloomberg survey of 30 finance professionals across four continents, the median consensus for the end of the current bull market is late 2018, with the next recession in the United States forecasted in the first half of 2019.

2. The market growth is disproportionately driven by a handful of companies. In 2016, just 10 companies accounted for more than half (52.5 percent) of the S&P 500’s total gains (9.5 percent).

3. Valuations are still reaching historical highs. According to Bank of America Merrill Lynch, the S&P 500’s forward price-earnings ratio is at its highest level since 2003. Also, the Dow experienced at least 53 record closings in 2017.

4. Consumer confidence has returned to pre-crisis levels. Since August 2017, the Consumer Confidence Index has been reaching levels unseen since shortly before the recession in mid-2007, suggesting the formation of another potential economic bubble.

5. Financial stress is at concerningly low levels. The St. Louis Fed’s Financial Stress Index reached its lowest level ever recorded in July 2017.

Source: FMI Capital Advisors