Positive momentum established for the year ahead

By and |  February 5, 2021


To borrow from FDR, 2020 was a year that “will live in infamy.”

2020 brought forth a cacophony of unique challenges, including economic distress, severe weather and political upheaval – all set against the backdrop of a global pandemic. This once-in-a-generation type of “black swan” event triggered a freefall across all aspects of society, and the subsequent economic toll impacted every industry, including construction materials.

The impact on you

Before the global health crisis, 2020 was set to be a pivotal year for construction materials, as federal infrastructure funding was in the spotlight with the FAST Act set to expire in September. Throughout the year, construction materials market sentiment operated like a pendulum, swinging back and forth between certainty and uncertainty throughout tumultuous seasons.

Media: Pit and Quarry


By the end of the year, optimism, earnings, and merger and acquisition activity all began to pick up, allowing the construction materials industry to finish on a stronger footing than previously expected. FMI expects this trend to continue into 2021, driven by new potential for funding, vaccine progress and a surprisingly robust residential market.

The construction materials industry started last year with cautious optimism, as operators began 2020 with larger-than-usual backlogs. Despite the strong start, the economy was thrown into upheaval within the first few months as fears of the coronavirus sent shockwaves into public markets.

2020 timeline

From Jan. 1 through the end of March 2020, the Dow Jones Industrial Average, S&P 500 and FMI’s Construction Materials Index (CMI) declined by 24.1 percent, 20.7 percent and 30.2 percent, respectively. The economic decline was further exacerbated by the oil price war that began waging between Saudi Arabia and Russia.

By mid-March, the U.S. was fighting a war on two fronts: the COVID-19 pandemic and the subsequent economic crisis. In an effort to limit the rate of infections and “flatten the curve,” state and local officials began instituting stay-at-home orders for nonessential workers and businesses. Between March 19 and April 7, 45 states instituted full or partial stay-at-home orders.

With millions of Americans at home and businesses shut down, the federal government needed to pass swift and meaningful legislation. On March 27, President Trump signed into law the CARES Act, a $2 trillion stimulus bill. Provisions in the bill included aid to small businesses such as the Paycheck Protection Program and aid to U.S. citizens.

Fortunately for the construction materials industry, most operations related to the sector were deemed essential. Still, reduced daily transit due to stay-at-home orders severely decreased tax revenues that fund infrastructure projects. Most construction materials producers trudged forward against these headwinds and were able to sustain reasonable operations throughout the summer, albeit less than originally anticipated.

September marked the expiration of the FAST Act, with reauthorization falling victim to a fiercely political climate and distracted leadership. A continuing resolution was passed to continue funding for another year at previous levels. While this was not the victory coveted, the continuing resolution provided a silver lining to budgetary committees trying to keep infrastructure projects moving forward.

November brought forth a contentious election, but also positive news of a vaccine, which sparked enthusiasm in the public markets. As the end of 2020 drew to a close, operations had stabilized in the “new normal” and even showed signs of an upward swing in momentum.

The year ahead

From Jan. 1, 2020, through March 2020, the Dow Jones Industrial Average, S&P 500, and FMI’s Construction Materials Index (CMI) declined by 24.1 percent, 20.7 percent and 30.2 percent, respectively. Source: CapIQ

From Jan. 1, 2020, through March 2020, the Dow Jones Industrial Average, S&P 500, and FMI’s Construction Materials Index (CMI) declined by 24.1 percent, 20.7 percent and 30.2 percent, respectively. Click to enlarge | Source: CapIQ

As we look at the market in early 2021, FMI sees promise of continued momentum brought about by a few key drivers.

One of the biggest surprise winners in 2020 was the single-family residential market. Despite the economic downturn, a flight-to-suburbia brought about from a work-from-home culture propelled housing sales and prices across the U.S. Mortgage rates are hovering near all-time lows, further driving motivated homebuyers.

Population demographics are also spurring growth in the single-family market, as a large segment of Millennials enter into their highest earnings potential, and first-time homebuyer age range. As the demand for single-family development grows, so too grows the need for construction materials.

Another area of the economy that has benefited from the lifestyle changes generated in 2020 is the warehousing and distribution sector. Stay-at-home orders and general health fears surrounding COVID-19 encourage individuals to shop online, which has helped companies such as Amazon to flourish. Growth in e-commerce directly increases the demand for warehousing space, which correlates with construction materials demand in the private sector. FMI expects this trend to continue in 2021 and further boost performance for construction materials in the coming year.

M&A preview

Regarding M&A activity for the construction materials space, FMI is bullish about the current market for both buyers and sellers.

Many buyers spent a good portion of 2020 building a “war chest” of cash, preparing to weather the storm but only to end the year better off than initially expected. These well-structured balance sheets, coupled with the low-interest debt availability, create an attractive landscape for pursuing both platform and bolt-on acquisitions.

Additionally, the 2020 election results are likely to lead to increased federal spending on infrastructure. Buyers, hopeful to capture the future earnings from the anticipated funding, are eager to pursue transactions in attractive markets.

In the first half of 2020, acquisition processes came to a full stop. They were frozen because of mass uncertainty and fear. The temporary pause on transactions helped create a backlog of opportunities waiting to be explored.

Activity picked back up as the year moved on, with the last quarter of 2020 proving fairly robust for M&A. We expect to see more and more sellers entering the market to meet buyer demand and continue the momentum into 2021.

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

Featured image: P&Q Staff

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