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 U.S., construction spending is expected to increase at an annual rate of 3.4 percent between 2017 and 2020. In December 2016, construction spending decreased 0.2 percent to $1.181 trillion. The slight decrease is coming off of November’s $1.184 trillion in construction spending, which was the highest amount of spending since April 2006. As of December 2016, construction spending was up 4.2 percent from a year ago in November 2015.
Infrastructure spending is expected to see a significant increase in upcoming years. Washington has recently spoken about its plan to invest $1 trillion into an infrastructure investment plan. This plan aims to build and update roads, highways, bridges, airports, tunnels and railways across the United States.
Nonresidential construction spending through December 2016 is up 4.6% percent compared to the same period in 2015, and monthly spending decreased 0.7 percent from November 2016. In addition, private and public nonresidential spending through December 2016 is up 6.3 percent and down 1.8 percent, respectively, compared to the same period in 2015.
The value of U.S. private residential construction spending, another indicator of the health of the construction market, increased 3.7 percent from December 2015 to December 2016, and increased 0.5 percent from November 2016.
Select public company metrics
Baker Tilly Capital reviewed publicly traded companies in the engineering and construction industry. The identified comparable public companies are trading in a wide range depending on many factors; EV/EBITDA ranging from 4.6x to 23.8x. During the second half of 2016 the adjusted EV/EBITDA mean for the engineering and construction industry mean rose 11.9 percent to 9.4x. The increase in the mean EV/EBITDA compares favorably to the S&P 500 index which grew by 6.5% during the same time period. Analysts believe that one reason for the increase in valuation of construction and engineering firms during the second half of 2016 was President-Elect Donald Trump’s anticipated infrastructure investment plan.
Public company valuations for engineering and construction firms can also vary considerably depending on the specific service and/or end market the company covers. For example, many of the lower valued specialty firms have significant exposure to the energy infrastructure industry, such as Chicago Bridge & Iron Company NV (5.1x EV/EBITDA), Goldfield Corporation (5.0x), McDermott International Inc. (6.4x), and North American Energy Partners Inc. (4.6x).
Sources: U.S. Census Bureau, FirstResearch, Washington Post, Wall Street Journal, Capital IQ
Average historical trading multiples
Note: Multiples are based on average enterprise values for each quarterly period and certain outliers were removed from the analysis
Select 2015 and 2016 transactions
The selected transactions with numerical data below are companies in the construction and engineering industry that occurred during 2015 and 2016. The market has seen constant acquisition activity, but publicly available valuation details are limited. During the second half 2016, the largest reported transaction was Quikrete Holdings Inc.’s acquisition of Contech Engineered Systems. Contech Engineered Systems operates as an engineering firm and an infrastructure manufacturer and its products include bridges, drainage systems, retaining walls, earth stabilization, and sewer and stormwater systems. The acquisition provides potential synergies for Quikrete Holdings and is expected to significantly advance the company’s growth strategy.
Number and aggregate enterprise value of engineering and construction deals with reported values (where EV < $1 billion) – United States and Canada
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