What’s ahead for the construction materials market?

By |  June 14, 2021
Photos: Jeff Gray, Paul McLaren, Matt Lepp, George Reddin, David Jones, Dan Johnson, Justin Melott, Don Moore, Hal Williford, Pat Jacomet, Ross Duff, Scott Alexander and John Garrison


No one is going to forget 2020 anytime soon. But perhaps lost by the aggregate industry in the series of events that unfolded from the pandemic is that producers began 2020 optimistic about the year in front of them.

Things took a sharp downward turn last March around ConExpo-Con/Agg. From there, producers had a variety of hurdles to clear to reach stable ground.

“We went to ConExpo, came back and things shut down,” says George Reddin, the managing director at FMI Capital Advisors who delivered a construction materials market update June 3 at the Pit & Quarry Roundtable & Conference. “The question became: Are we essential? We got past that.”

Later, questions surfaced around state Department of Transportation funding levels because so few drivers were on roads.

“So, we anxiously waited to see at the end of June [2020], for many states, what was going to happen with their budgets,” says Reddin, who specializes in mergers and acquisitions and financial advisory services. “Most of them just kind of passed continuing funding at similar levels, so that was good.”

By late summer, the FAST Act’s reauthorization, the election season, stimulus package impacts and vaccine developments were front and center for the industry. The combination produced terrible uncertainty, Reddin says.

“When you’re in my business of trying to help people sell their business, uncertainty is the kiss of death,” he says. “People don’t make big decisions like that when there’s uncertainty.”

Strong performers

Photo by Pit & Quarry staff.

FMI’s Construction Materials Index is up 43 percent since last November. Photo: P&Q Staff

Some clarity on those questions was provided late last year, Reddin says, but other key questions emerged at the start of 2021. For example: Will a major infrastructure bill come forward this year, and will the surface transportation program be reauthorized?

Still, despite lingering questions, Reddin says the construction materials sector has performed well since last November’s elections. In fact, the 17 public companies operating in FMI’s Construction Materials Index (CMI) have collectively outperformed the Dow Jones Industrial Average and the S&P 500 since November 2020.

“The construction materials sector is up 43 percent since then, versus 28 and 27 [percent], respectively, for the Dow Jones and the S&P 500,” Reddin says. “They’ve done really, really well.”

But why such tremendous gains in the construction materials sector over the last seven-plus months? For one, Reddin says expectations for infrastructure spending were big coming off election results. Plus, more promise surfaced on the vaccine front.

“So, business was back to usual,” Reddin says. “Infrastructure buzz on Wall Street was big. Everybody wants to invest in these [CMI] companies.”

Another reason CMI companies continue to draw interest is because margins are strong across the industry and indicate attractive market pricing.

“We had healthy budgets going into [2020] and we got the hit with the pandemic, but by hook or by crook, we ended up the year pretty good,” Reddin says. “We didn’t have a disaster, so maintaining these margins during this period is very impressive.”

M&A analysis

Photo: iStock.com/Cecilie_Arcurs

Although merger and acquisition activity cooled off during the first half of 2020, it has picked up of late. Photo: iStock.com/Cecilie_Arcurs

The market environment has been conducive to dealmaking of late, too. By FMI’s count, only eight construction materials mergers and acquisitions (M&A) were announced during the first half of 2020. But 29 were announced during the second half of last year, and another 20 were announced by the start of the June 2-3 Pit & Quarry Roundtable & Conference.

“We’ve had more announced deals in the last six months than at any time in the last five years,” Reddin says.

More sizable M&A is taking place these days, too. While producers continue to expand with bolt-on deals, the fundamentals are right for companies to pursue platform creation and what Reddin calls “thunderclap” deals.

“Platform creation, or platform deals, typically only happen in markets where the buyers are enthusiastic and optimistic about the future because they don’t bring any strategic benefits to the table,” Reddin says. “They’re banking on filling a hole in a map [and] growing their business. But they’re just trading places, in many cases, with the current owners.

“To get the current owner’s attention on value, they’ve got to be optimistic about how they can grow that business and pay back that investment,” he adds. “And we’re right in the middle of that right now.”

Recent examples

Photo:CRH’s year-end 2020 acquisition of Barriere Construction is one example Reddin cites of a major producer completing a platform deal.

“Barriere is a sand and gravel and hot-mix asphalt producer in Louisiana,” he says. “There were no publicly traded companies in Louisiana. Nine private families did all of the asphalt, [although] you had StonePoint Materials, a leading sand and gravel producer, there.”

Ironically, Arcosa acquired StonePoint just a few months after CRH added Barriere. Reddin, however, describes the Arcosa-StonePoint transaction as more of a “thunderclap” deal.

“I’m going to call those the billion-dollar club [deals] that happen periodically,” he says. “[They] can go lower.”

Arcosa, for instance, acquired StonePoint from an affiliate of Sun Capital Partners in April for $375 million. But even larger thunderclap deals were announced after the Arcosa-StonePoint deal was completed.Photo: Martin Marietta Logo

Martin Marietta announced at the start of May that it acquired Minnesota-based Tiller Corp. Three weeks later, Martin Marietta came to an agreement to acquire Lehigh Hanson’s West Region business in a $2.3 billion deal.

Yet another thunderclap deal went down at the start of June, with Vulcan Materials acquiring U.S. Concrete in a transaction valued at nearly $1.3 billion.

“We’re seeing a lot more of this right now than we would have two or three years ago,” Reddin says. “Part of that is the optimism the public companies have in the future and the sentiment shared by the analysts, because we’re seeing their stock prices go up, up, up.”

Residential construction

Much of the strength in the market can be attributed to improvements in single-family residential spending, up more than 20 percent over the last three years. Photo: iStock.com/halbergman

The pandemic provided a significant spark to the residential construction market. Photo: iStock.com/halbergman

According to Reddin, the one construction market that really took off during the pandemic was residential. Several drivers were behind residential’s strong performance.

“If we’re going to work from home, I maybe need to do a renovation and add some space,” Reddin says. “Or, I need a bigger house or to buy a house. Or, I want to get out of the urban markets because I’m worried about the congestion and spread of disease. So I’m going to move out.”

Low mortgage rates were a tremendous driver of residential’s recent growth, as well. And population shifts are creating new opportunities in the category.

“When we look at the population by demographics, the biggest piece out there right now is the millennials and Gen X,” Reddin says. “These are first-time homeowner buyer candidates. That wave isn’t going away. You’ve got some interesting fundamentals that say there’s a demand factor that’s not going away.”

Still, a significant residential market question remains.

“What we had was an imbalance of inventory,” Reddin says. “We had too much of a gap between the supply of homes and the demand. So, how long does that take to catch up?”

Nonresidential construction

Photo: oksanaphoto/iStock / Getty Images Plus/Getty Images

Although new warehouses sustained nonresidential construction during the pandemic, new buildings such as offices – including those within U.S. metro areas – may be less likely to go up in the years to come. Photo: oksanaphoto/iStock / Getty Images Plus/Getty Images

While the pandemic created opportunities for residential construction, Reddin says it probably hit nonresidential construction the hardest.

“Who’s going to build a new office building right now until we figure out what the new normal is,” Reddin says. “If it wasn’t already in progress, I think people are taking a wait-and-see [approach].

“Who’s going to build the new religious building right now after missing out on significant contributions by not having people at their services,” he adds. “Who’s going to build a new hotel today?”

One area that fueled nonresidential construction through the pandemic was e-commerce and warehousing.

“In the last five years, Amazon has built more warehouse space than Walmart has built [in] its existence – and Walmart hasn’t slowed down,” Reddin says. “They are fast pour, high spec and they’re not overly concerned about price. They’re concerned about service, reliability and delivery. And they’re big consumers of construction aggregates.”

Highways and streets

Photo: Bim/iStock / Getty Images Plus/Getty Images

Highways and street construction has been somewhat stable through the pandemic despite uncertainty that surfaced in 2020. Photo: Bim/iStock / Getty Images Plus/Getty Images

Forecasted spending for highways and streets is expected to be flat or slightly down in 2021, according to FMI. But spending is fortunately expected to return to historical levels.

“The FAST Act came along and wasn’t that impressive on the dollars,” Reddin says, referring to the 2015 surface transportation reauthorization. “But it was impressive in that it gave us five-year visibility for planning purposes.”

That visibility was comforting following a period of continuing resolutions from 2009 to 2015, Reddin adds. Yet another continuing resolution came forward last September, but the Senate Environment & Public Works Committee approved this May the bipartisan Surface Transportation Reauthorization Act (STRA). If passed, STRA would set a new baseline funding level at a historic high of $303.5 billion for Department of Transportation programs for highways and bridges.

Add to the surface transportation reauthorization the prospect of a broader infrastructure bill, and there is certainly momentum building for highways and streets.

“If we get that infrastructure bill and we get that reauthorization, the 12-month period to follow should be very, very busy,” Reddin says.

One more thing

On the downside, Reddin says two areas to watch in the coming months are inflation and interest rates.

“We just haven’t dealt with [inflation] in so long that we’re kind of numb to it,” he says. “It’s been a long time since we’ve had high interest rates or high inflation. I think those are two of our biggest risks going forward.”

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About the Author:

Kevin Yanik is editor-in-chief of Pit & Quarry. He can be reached at 216-706-3724 or kyanik@northcoastmedia.net.

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