Assessing the construction materials market right now

By , and |  August 15, 2022
Photo: P&Q Staff

Construction materials M&A has seen large ‘thunderclap’ and platform deals go down over the last couple of years. Photo: P&Q Staff

Still, according to The Economist: “Recent data has shown that there may be some relief on the horizon. An index of supply chain problems compiled by the New York Fed, comprising global transport costs and the opinions of purchasing managers, among other things, has clearly eased, though it remains well above the pre-pandemic norm.”

The easing of supply chain constraints should aid in the fight against inflation and assist construction materials producers in getting much-needed equipment in a timelier fashion.


Despite negative headlines, some construction materials operators have a way to mitigate the impact from an economic downturn through federal funding from IIJA.

The $1.2 trillion bill was enacted in 2021, earmarking about $350 billion for roads, bridges and major projects. The funding from IIJA was originally scheduled for disbursement to state departments of transportation in 2022, but it has been delayed.

Operators expect the allocated dollars to be spent in 2023 through 2026. Brian Strawberry, chief economist at FMI, highlights the benefits for construction materials in a recent report titled “How Bumpy Is It Going To Get? Mapping Recession Scenarios.” Says Strawberry: “On the nonresidential heavy civil side, the IIJA will fund horizontal infrastructure projects through the forecast period, benefiting the highway and street [and] transportation … infrastructure.”

FMI is calling for highway and street and transportation spending to buoy nonresidential construction spending through 2026. Resource-constrained transportation departments are experiencing several headwinds that could result in major project delays. Therefore, resurfacing projects will continue to be popular. Public infrastructure-focused construction materials firms will benefit from committed funding for the next five years.

The residential sector tells a different story. The once-darling segment of construction during the pandemic is beginning to experience a hiccup. The Fed raising interest rates increased borrowing costs for prospective homebuyers, thus dampening the market. The monthly supply of new, single-family homes reached an alarming 9.3 months in June 2022 (eight months is a recession predictor), after both April and May were greater than eight months.

Still, it is vital to remember the classic adage “construction is a local business.” Construction materials operators with residential exposure in strong markets will be less affected by national trends.

Current performance

There are a few bright spots in recent economic data.

Demand for construction aggregates remains high, with the U.S. Geological Survey revealing that crushed stone and sand and gravel production increased by 3.5 percent and 5.2 percent respectively in the first quarter of 2022 compared to the same period in 2021.

In terms of a cement outlook for the remainder of the year, Enrique Escalante, CEO of GCC, points out that the company’s “system is sold out, supported by [a] considerable backlog.”

Additionally, there is an oddity in the labor market as it relates to the recession. Of the 12 recessions in the U.S. since 1948, the jobless rate has always risen above 6.1 percent. As of June 2022, the labor market remains tight with a 3.6 percent unemployment rate. Therefore, there is a “margin of safety” before employment trends coincide with historic recessions.

Based on May data, there are almost two jobs available for every unemployed person, meaning the labor market remains resilient.


The combination of unprecedented government stimulus, a historically accommodative borrowing environment and stock prices reaching all-time highs was a winning formula for M&A activity in 2021. But the realities of the current economic environment are beginning to impact M&A.

The construction materials industry is beginning to see the market contract as pandemic-fueled aggressive fiscal and monetary policies tighten. As such, buyers are exercising more caution in M&A pursuits and focusing on strategic targets.

Michael Haack, president and CEO of Eagle Materials, sums up buyer sentiment best on the company’s first quarter of fiscal year 2023 earnings call. Says Haack: “Our first priority remains growth and improvement investments … we will not compromise either aspect and pursue growth for growth’s sake.”

So how are buyers defining “strategic” targets? These targets are in attractive markets, adjacent to buyers’ current operations, with stable funding and positive population trends. These factors present an investment thesis attracting multiple buyers, thus creating a competitive sale process and ultimately leading to attractive valuations.

Strategic targets tend to have defensible market share with predictable earnings, giving buyers comfort against negative economic environments. Additionally, for international firms, the U.S. presents a more stable market for capital investments compared to markets abroad. This should help fuel domestic M&A for international construction materials buyers. Sellers who fit these criteria will still receive premium valuations despite the pending economic uncertainty.

Construction materials M&A has seen large “thunderclap” and platform acquisitions in recent years, including Vulcan Materials’ acquisition of U.S. Concrete and Martin Marietta’s acquisition of Lehigh Hanson’s Western assets in 2021. FMI anticipates buyers will be more focused on bolt-on acquisitions in the near-term. These acquisitions help reduce risk for buyers when deploying capital, and they can bolster current geographic footprints.

“These investments should bolster and expand existing home markets and position the company for consistent profitable growth,” says Kyle Larkin, president and CEO of Granite Construction, during the company’s second quarter earnings report.

Bolt-ons also present attractive opportunities to consolidate overhead and broaden product offerings to customers. Given the current market conditions, the scope of attractive targets has been refined for buyers – with bolt-ons becoming more of a preference.


FMI is calling for a recession in the near-term. Economists, pundits and talking heads are now debating the length and severity of the downturn. And despite the negative headlines, there are still positives for construction materials.

Guaranteed funding from IIJA has the ability to outlast high inflation, and demand for products shows no signs of slowing as of yet.

Still, it is important to remember that construction is a local business. Certain markets will remain resilient despite signals of a cooling residential sector.

For M&A, buyers remain active and are willing to pay premium valuations for strategic targets in attractive markets. Those willing to take calculated risks during uncertain times could see themselves in a stronger position to capitalize on the inevitable recovery.

George Reddin, Rob Mineo and Evan Coughlin are with FMI Capital Advisors.

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