Engineering and construction M&A update: H2-2017

Engineering and construction industry overview and indicators

Baker Tilly Capital, LLC’s engineering and construction M&A update provides an overview of the U.S. engineering and construction sector, including recent performance and M&A trends.

In the second half of 2017 (H2-2017), construction spending totaled $648.8 billion, which represented a 12 percent increase from the first half of 2017 (H1-2017) and a 2 percent increase from the same period in 2016. Growth in total construction spending has decelerated since 2015, but remains positive. With the passage of the Tax Cuts and Jobs Act, private capital expenditures could continue to accelerate.

Select public company metrics

Baker Tilly Capital reviewed publicly traded companies in the engineering and construction industry. As of December 31, 2017, the identified comparable public companies (after exclusion of outliers) traded at an average of 11.2x EV/EBITDA and traded between 4.2x and 19.5x EV/EBITDA. Average EV/EBITDA multiples expanded from 10.2x to 11.2x from July 1, 2017 through the end of the year, which equates to a 10.3 percent increase, mirroring the 10.7 percent increase of the S&P 500 during the same time period. The current multiple average of 11.2x marks the engineering and constructions group’s highest average trading multiple since before the Great Recession (2007-2009).

Operationally, performance for the peer group was positive during 2017. Average revenue growth for the peer group was 6.21 percent during 2017, while EV/EBITDA growth averaged 1.43 percent. Thirty of 36 firms reported positive EBIT and 27 of 36 firms reported positive net income.

Public company valuations for engineering and construction firms can vary considerably depending on the specific service and/or end market the company does business in. Generally, companies we classify as specialty firms lag the other constituents of the peer group in terms of trading multiples and that trend became more pronounced during the H2-2017. During H2-2017, specialty firms averaged 9.9x EV/EBITDA, while the diversified engineering and constructions services and contractor firms averaged 12.7x EV/EBITDA.

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