Market insights: Q1 2016 construction materials update

By , and |  June 8, 2016

The first quarter of 2016 included several areas of interest for the construction materials market. Public companies released strong 2015 year-end earnings reports, stock prices continued their trend of beating the overall market, and transaction activity remained robust.

In the first quarter, public companies reported annual results for 2015 and the news has been almost universally positive. The trend in volumes and margin growth remains strong for most companies, driven primarily by strong growth in housing markets and the continuing recovery of nonresidential spending.


As Figure 1 indicates, the companies in the Construction Materials Index (CMI) experienced strong revenue growth in 2015, particularly those companies focused on U.S. markets. With revenue growth comes greater operational leverage, driving strong year-over-year EBITDA margins for CMI companies focused on U.S. markets. In 2015, CMI companies returned to pre-Great Recession financial performance, with EBITDA margins, leverage ratios and stock prices all within striking distance of where they were at the beginning of 2009.

The strongest performers in 2015 included U.S. Concrete, which saw revenue growth of nearly 40 percent year-over-year, and EBITDA growth of about 72 percent. While some of this growth is owing to acquisition activity, U.S.-focused companies tended to perform better on average than their international counterparts.


Vulcan Materials, Granite Construction, Summit Materials and Martin Marietta all reported EBITDA gains in excess of 29 percent. Larger international players faced subdued growth in emerging markets and developing economies, but still managed healthy revenue gains.

As the CMI companies exhibited strong financial performance in 2015, so did their stock prices: The CMI outperformed the Dow Jones Industrial Average by a whopping 15.7 percent in 2015 (Figure 2). The first quarter started with a substantial reversal of this trend; however, the CMI had recovered by late February (Figure 3).


One measure of the CMI continues to exceed even the boom of the 2006 and 2007 market: the price at which CMI companies are trading on an enterprise value (EV) to EBITDA basis. As Figure 4 demonstrates, since the summer of 2013 the average EV to EBITDA multiple for the CMI has steadily exceeded 10x.

While the reasons for the multiple expansion of CMI firms are myriad, the practical implications are important to the acquisitions market. If a public company is trading at 10 times EBITDA, theoretically every additional dollar of EBITDA the company generates will increase the company’s enterprise value by $10.

Accordingly, the company can enter the acquisition market and drive immediate shareholder value simply by acquiring firms at a lower multiple. For example, if our theoretical buyer purchases a business that generates $10 million in EBITDA for $60 million (a six times multiple), the buyer’s market valuation will expand by $100 million (a 10 times multiple).


This is a powerful tool for public companies. When combined with low interest rates, the passage of the Fixing America’s Surface Transportation (FAST) Act and robust residential construction markets, buyers continue to have a strong incentive to grow through acquisition.

Volumes and market drivers

The sector continued to exhibit production growth in 2015, although growth rates declined somewhat. Production continues to lag peak volumes achieved in 2006 and 2007; however, strong residential markets and the passage of the FAST Act provide catalysts for continued production growth. Pricing in crushed stone markets was strong in 2015 with an average 3.1 percent increase in prices across the United States.

The outlook for residential construction remains strong driven by low interest rates, improving employment data and high demand. Private sector construction continues to assist in driving greater earnings for materials companies, though private sector volumes remain well below their highs of 2006 and 2007.



Highway construction spending jumped 7 percent in 2015 and the FAST Act provides some certainty to operators across the country. Though the passage of the FAST Act is a long overdue development, the legislation is unlikely to drive a significant jump in highway spending.

According to the American Association of State Highway and Transportation Officials, about $163 billion is required annually for highways, bridges and transit systems, while only $105 billion is being invested.

Recent transactions

Transaction activity in the first quarter remained robust with several larger deals announced by Summit Materials and Martin Marietta. The LafargeHolcim transaction and related divestments, as well as the Heidelberg Italcementi deal, have continued to distract larger players from smaller transactions, but we expect this to moderate by the latter half of 2016.

Notable transactions closed in the first quarter included:

      • Summit Materials sold an additional 10 million shares of common stock at a price of $20.15 per share on April 19. The transaction comes as the company is trading at approximately eight times EBITDA and represents an exit for certain shareholders of the company. Summit did not receive any proceeds of the offering. Summit also acquired Roanoke, Va.-based Boxley Materials and American Material Co. in February. The combined acquisition includes 11 aggregate facilities, four asphalt plants, four ready-mix plants and an architectural products manufacturing facility. The combined transaction value was $250 million, approximately eight-and-a-half times trailing EBITDA (inclusive of synergies).
      • Martin Marietta Materials acquired two businesses on the Front Range of Colorado, Rocky Mountain Materials and Front Range Aggregates. The Rocky Mountain materials acquisition included a hard rock quarry, two sand-and-gravel pits, two ready-mix plants, two asphalt plants and a recycling facility, while the Front Range Aggregates transaction included an aggregates facility, yard and short-line railroad. The acquisition further solidifies Martin Marietta’s position in that greater Front Range marketplace that they acquired from Lafarge in 2011.
      • U.S. Concrete was also active in the first quarter, with acquisitions of Brooklyn, N.Y.-based Greco Brothers and Abilene, Texas-based Strickland Bridge Co. The Greco acquisition included two ready-mix plants and 37 mixer trucks, while the Strickland Acquisition included one plant and a fleet of six mixer trucks.
      • Breckenridge Materials, St. Louis, acquired selected assets of Lincoln Sand & Gravel in April. The new company will operate as BMC Sand LLC.


George Reddin, managing director, and Scott Duncan, director, are with FMI Capital Advisors Inc., FMI Corp.’s investment banking subsidiary. They specialize in mergers and acquisitions and financial advisory services.

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