Momentum building for 2019 M&A construction materials market

By and |  May 24, 2019
Photo courtesy of Martin Marietta

M&A activity in the construction materials sector could pick up later this year due to a number of factors. Photo courtesy of Martin Marietta

The first quarter of 2019 was relatively quiet for construction materials mergers and acquisitions.

While several bolt-on transactions were announced, the market appeared to be taking a breath following a market downturn in the second half of 2018. This pause in M&A activity was likely the result of questions arising from the slump in financial markets and concerns from acquirers about whether 2019 financial performance would rebound following a wet, disappointing 2018.

FMI dubbed 2019 the “show me” year, as lofty expectations for 2018 were thwarted by weather, tariffs and other factors outside the industry’s control, making 2019 performance critical to show investors that 2018 was an anomaly and that backlogs justify premium valuations.

Quarterly highlights

The results of the first quarter this year are largely positive. FMI’s Construction Materials Index (CMI) companies showed robust gains in volumes, pricing and stock price performance. Here are a few highlights from producers:

Vulcan Materials reported a 17 percent increase in first-quarter revenues and a 15 percent growth in EBITDA (earnings before interest, tax, depreciation and amortization) versus first quarter 2018. The company notes a strong performance in its aggregate segment with growing public construction demand.

Martin Marietta reported record first-quarter revenues and EBITDA, with growth of 17 percent and 28 percent, respectively. Increases in both volumes and pricing drove the growth. The company is forecasting annual growth in volumes of 6 to 8 percent overall in 2019 on top of pricing improvements of 3 to 5 percent.

Summit Materials reported an increase of 5.5 percent in net revenue, although flooding in the Midwest negatively affected the company’s cement business. The company reported strong growth in pricing and volumes in its aggregate business, particularly in the eastern United States.

Granite Construction reported a 10 percent year-over-year increase in revenues, but it faced weather-related issues in the western United States, primarily in California, which led to lower-than-expected margin performance.

U.S. Concrete’s first-quarter total revenues increased 1.6 percent year over year, with aggregate revenue up 25 percent versus 2018. The company’s ready-mix division in particular faced weather-related issues, particularly in California.

Other indicators

Investors largely anticipated the overall strong performance of the industry in the first quarter. As of mid-May, FMI’s CMI is up more than 20 percent year to date, compared to 14 percent and 10 percent for the S&P 500 and Dow Jones Industrial Average, respectively.

Looking ahead, economic growth, demonstrated by a 3.2 percent annualized growth in first-quarter gross domestic product, continues to drive favorable tailwinds for the market, with strong growth in both state infrastructure spending and nonresidential construction spending across the United States adding an additional catalyst. The key nonresidential sectors of transportation and highway and street construction are forecasted by FMI to grow at 9 percent and 5 percent, respectively, in 2019.

Also, discussions between President Trump and Democratic congressional leaders have provided additional momentum to CMI stock prices. While substantial obstacles to new legislation persist, infrastructure legislation appears to be one of the few areas where Democrats and the president can agree broadly.

President Trump, House Speaker Nancy Pelosi (D-California) and Senate Minority Leader Chuck Schumer (D-New York) agreed on a $2 trillion infrastructure package in a meeting this spring. While no details were agreed upon regarding how an infrastructure package that large would be financed, the mere discussions sent stocks higher.

While the federal infrastructure carrot will continue to hang in front of the construction materials sector, states have demonstrated their ability to pick up where Washington has failed. California, Texas, Florida, Georgia, Washington and others continue to drive increased spending on infrastructure. California’s SB 1, for example, will inject $52 billion into California infrastructure, creating strong opportunity for materials firms and contractors in the state despite the lack of a robust infrastructure package from the nation’s capital.

So far in 2019, Alabama, Arkansas, North Dakota, Ohio, Utah, Virginia and Wyoming have passed funding initiatives. These state infrastructure packages are influencing construction materials volumes across the country and driving optimism for many industry CEOs.

Takeaways

Combined with continued stability in the housing market and growth in the nonresidential sector, the growth in infrastructure spending and the optimism for federal legislation has driven renewed optimism for the market.

Still, high expectations come with rosy forecasts. Analysts are projecting meaningful increases in revenue and profits for public companies in the sector. Of FMI’s 16 CMI companies, analysts expect a median improvement in 2019 revenue of 5 percent and a median 17.2 percent improvement in EBITDA.

In other words, investors expect the weather issues of 2018 to be a one-time event, and for the catalysts discussed prior to drive improved operating leverage and profit margins.

While wild cards like trade disputes, interest rate increases and weather can quickly drive optimism from the market, high analyst expectations, a strong market outlook and continued optimism for additional market catalysts are likely to drive a rebound in M&A in the latter half of 2019.


George Reddin, managing director, and Scott Duncan, managing 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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