mercer capital's value focus: construction industry | q1 2016

BUSINESS VALUATION & FINANCIAL ADVISORY SERVICES

Construction Overview Construction & National GDP 1Construction & National Unemployment 2Value of Construction Put-in-Place 3

Sector Focus: Residential Construction 4

30-Year Mortgage Rate 5 NAHB Indices 6Housing Starts & Permits 7New and Existing Home Sales &

Months of Supply 9

Sector Round-up Building Materials 10Roads, Bridges & Highways 11Nonresidential Construction 12

Mergers and Acquisitions 13

Bellwether Stocks & Industry Participants 14

About Mercer Capital 17

www.mercercapital.com

VALUE FOCUS

First Quarter 2016

Construction & Building Materials

SEGMENT FOCUS Residential Construction

EXECUTIVE INDUSTRY TRENDS

• The Fed’s raising of rates has not had a negative impact on the

industry as previously expected

• Construction activity increased steadily for both residential and

nonresidential put-in-place

• The FAST Act has not had immediate impact on transportation

activity, but should have an effect starting in the second half of

2016

• 30-Year Mortgage rates and 10-Year Treasury yields dropped 27

and 35 BPS this quarter, respectively, aiding additional investment

• Home sales have picked up due to high demand

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© 2016 Mercer Capital // www.mercercapital.com 1

Mercer Capital’s Value Focus: Construction & Building Materials First Quarter 2016

GDP rose 3.3% over the past twelve months, reaching the higher end of an ideal range of 2% to 4% annually. Over the

past ten years, construction has averaged 4.1% of national GDP, and it accounted for 4.2% of GDP this past quarter.

Construction lagged behind the rest of the economy, particularly in the years following the decline of 2009, but steadily

recovered, marked by a 9.7% year-over-year increase in Construction GDP. Activity is expected to continue to improve

going forward.

$0 $100 $200 $300 $400 $500 $600 $700 $800

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

2007

Q1 Q2 Q3 Q4

2008

Q1 Q2 Q3 Q4

2009

Q1 Q2 Q3 Q4

2010

Q1 Q2 Q3 Q4

2011

Q1 Q2 Q3 Q4

2012

Q1 Q2 Q3 Q4

2013

Q1 Q2 Q3 Q4

2014

Q1 Q2 Q3 Q4

2015

Q1 Q2 Q3 Q4

2016

Q1

GD

P ($Billions)

Ann

ualiz

ed R

eal G

row

th R

ate

Quarterly Growth Average Quarterly Growth GDP (Current Dollars) Source: Bureau of Economic Analysis

-6%

-4%

-2%

0%

2%

4%

6%

National Construction

Construction OverviewConstruction & National GDP

Construction Gross Domestic Product

% Change in GDP

Source: U.S. Bureau of Economic Analysis

Construction GDP

Period % Change

Q-o-Q 2.4%

Y-o-Y 9.7%

National GDP

Period % Change

Q-o-Q 0.4%

Y-o-Y 3.3%





According to the Federal Reserve, the current unemployment rate is 5.0%. This represents a decrease from 5.5% a

year ago.

Construction is a cyclical and seasonal industry, so its unemployment rate is more volatile. The major contributing

factor to the seasonal nature of the construction industry is the weather. Production of materials and projects in general

decrease during the cold, winter months. The construction unemployment rate is currently 8.7%, down from 9.5% a

year ago. While the current level does not appear, it is expected to decrease as the year progresses and the weather

improves. Year-over-year rates have decreased in every month since 2010, so the rate could fall lower than 5.0% by

September of this year. Lower unemployment rates suggest an increase in activity within the industry.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

National Construction

Source: U.S. Bureau of Labor Statistics

Note: The national unemployment rate is seasonally adjusted, but the construction unemployment rate is not in order to show seasonality and recent trends.

Construction OverviewConstruction & National Unemployment

Unemployment Rate





The value of construction put-in-place is the total cost of construction on a job site for a particular period. The US

Census Bureau tracks this data and reports the total monthly. These costs include, but are not limited to, the building

materials, labor, profit, engineering, interest, and taxes.

Year-over-year put-in-place construction has increased by 12.9% for residential and by 9.3% for nonresidential. This

past quarter shows a similar pattern with residential construction increasing by 4.0% and nonresidential construction

increasing by 3.6%. This activity is expected to continue as construction levels strengthen. Higher levels of put-in-place

construction suggest an increase in activity within the industry.

Construction OverviewValue of Construction Put-in-Place

$0$100$200$300$400$500$600$700$800

$Billions

Residential Nonresidential

Source: U.S. Census Bureau

Value of Construction Put-in-Place

Residential

Period % Change

Q-o-Q 4.0%

Y-o-Y 12.9%

Nonresidential

Period % Change

Q-o-Q 3.6%

Y-o-Y 9.3%

Source: U.S. Census Bureau





The interest rate hike of 25 basis point by Federal Reserve in December 2015 caused some to worry about its effects

on the homebuilding industry. Despite some economists prediction of a subsequent economic downturn, the industry

has proceeded with cautious optimism and seems to have continued to strengthen. The Fed’s tightening of monetary

policy represents a potential rise in financing costs. Rate hikes typically harm the homebuilding industry, but concerns

have largely been mollified by low 30-year mortgage rates, shrinking unemployment, mild wage growth, and growing

consumer confidence.

General economic conditions have been improving, causing an increase in investment in residential construction, but

this growth has been stunted by a short supply of labor and housing. Construction unemployment levels are returning

to low levels, but the overall level of employment in the industry is depressed because the recession forced many firms

and workers out of the market. A lack of workers has caused wages to increase as an input cost, but not to a detrimental

level at this point.

Tight labor conditions have caused pent-up demand for houses and, therefore, home prices have increased. These

factors have led homebuilders to shift focus away from maximizing the number of homes built and sold. Instead, they

are focusing on more easily controlled financial metrics such as growth rate, gross margins, average sale price (ASP),

absorption rates, and SG&A. This sharply contrasts the rapid expansion that categorized the period leading up to the

recession, indicating the market is poised for slow and steady long-term growth.

Homebuilders secured cheap land in the wake of the financial crisis. In recent years, firms have shifted away from

aggressive land acquisition towards smaller projects with shorter turnover rates. Financial flexibility has become a

key concern for major players in the industry who are not interested in tying up capital as the market emerges from

its struggles. Companies are increasingly using call options as part of their land acquisition strategy. They pay a small

amount to lock in prices, and then purchase lots as prices increase. This strategy allows home builders flexibility, while

enabling them to react quickly to the market.

Homebuilders are also focusing their attention to where demand is highest, particularly near urban areas with high job

growth. As people move back into cities, closer-in and infill construction has become increasingly popular. In addition,

people are concerned with the cost of housing. Rising ASPs have led people to choose what are typically considered

entry-level homes. Between rising costs and the necessity for city proximity, rent-to-ownership rates have risen in recent

years. As millennials age, however, they are expected to shift back to home ownership, representing an opportunity for

expanded growth in the residential construction industry.

Sector FocusResidential Construction





The 30-year mortgage rate is the most common financing tool home buyers use in the U.S. When mortgage rates

decrease, the overall cost to the consumer decreases, so demand for homes increases. Mortgage rates have been

somewhat volatile, but overall have been decreasing since a dramatic increase in June of 2013. If this trend continues,

even more homebuyers are likely to enter the market.

Residential Construction30-Year Mortgage Rate

30-Year Mortgage Rate

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Source: Freddie Mac

30-Year Mortgage Rate

Period Change

Q-o-Q -27 BPS

Y-o-Y -8 BPS





The National Association of Home Builders conducts two separate surveys, the Housing Market Index (HMI) and the

Remodeling Market Index (RMI), to measure confidence in the home building industry. Respondents rate their activity

on a scale from 1-100 with 50 being average. The HMI is produced monthly and asks respondents to rate market

conditions both at present and looking forward six months. While the monthly index has recently gone up or down with

seemingly no pattern, it is encouraging that it has been above 50 for the past seven quarters, including a ten-year high

in October 2015. The RMI is produced quarterly and asks respondents to rate their work volume as either higher or lower

than the previous quarter. 1Q16 was the lowest in two years, though it should be noted the first quarter has been the

lowest in each of the past three years, so it will likely increase coming out of the winter months. The index has remained

above the average of 50 for the past three years, which is an additional positive sign.

0

10

20

30

40

50

60

70

80

90

100

HMI RMI

Source: National Association of Home Builders

Note: RMI is measured quarterly and approximatedon a monthly basis using a straight-line approach.

Residential ConstructionNAHB Indices

NAHB Housing Market and Remodeling Market Indices

NAHB HMI

Period % Change

Q-o-Q -3.3%

Y-o-Y 11.5%

NAHB RMI

Period % Change

Q-o-Q -6.6%

Y-o-Y -4.9%





Building permits and housing starts are two important indicators for the home building industry. Both reflect demand,

consumer confidence, and the feasibility of financing such construction projects. Building permits can be issued and

then shelved by builders; therefore, housing starts are a better focused measure of current activity within the industry.

Housing permits and housing starts have felt the effect of the housing bubble with a steep drop of nearly 75% in three

years from Q1 2006 to Q1 2009. Both of these have recovered somewhat as the economy has gotten back on track, but

they are unlikely to reach prerecession highs, which were artificially high due to the housing bubble. As seen in the chart

and tables below, all levels of permits and starts have increased over the past year despite declining in this past quarter.

Residential ConstructionHousing Starts & Permits

Seasonally Adjusted Annualized Rates of New Housing Starts and Building Permits

Millions of Units

Private Housing Starts

Period % Change

Q-o-Q -6.0%

Y-o-Y 14.2%

Single Family Starts

Period % Change

Q-o-Q -0.7%

Y-o-Y 22.6%

Private Building Permits

Period % Change

Q-o-Q -10.6%

Y-o-Y 3.7%

Single Family Building Permits

Period % Change

Q-o-Q -1.1%

Y-o-Y 12.8%

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Private Housing Starts Single Family Starts Private Building Permits Single Family Building Permits

Source: U.S. Census Bureau Note: Permits at a given date are generally a leading indicator of future starts. Beginning with January 2004, building permit data reflects the change to the 20,000 place series.

Private Housing

Single Family

Housing





Housing starts increased notably in 2015 compared to 2014. The biggest jump was in the Northeast, which increased

by 26.0%. The only region where housing starts decreased was the Midwest. The South remains the area with the most

starts; there were more than 550,000 housing starts in the South, more than double the next highest, which was the

West with over 265,000 starts.

Single family housing starts increased for every region at varying levels. The Midwest had the slowest growth at 1.5%,

and the West had the largest increase year-over-year with 13.9%. The South continues to have the most single family

housing starts, but the Midwest maintains the highest percentage of its housing starts devoted to single families.

Residential ConstructionHousing Starts & Permits(continued)

Regional Housing Starts

Period

Y-o-Y

% Change

Midwest -6.2%

Northeast 26.0%

South 11.9%

West 12.9%

Regional Housing Starts

Single Family

Period

Y-o-Y

% Change

Midwest 1.5%

Northeast 7.0%

South 11.9%

West 13.9%

2015 Housing Starts by Census Region

Thousands of Units

2015 Single Family Housing Starts by Census Region

Thousands of Units

West265.4

West165.1

Midwest152.5

Midwest107.3

South555.6

South387.0

Northeast138.1

Northeast54.8





Home sales, both new and existing, give a sense of the market for people looking to buy houses. Sales track the number

of homes actually sold in a month. Months of supply is another measure of the home buying market; it shows how long it

would take for all of the homes currently on the market to be purchased. It is alternatively known as the absorption rate.

Four to five months is considered average, with lower levels signifying a pricing advantage for sellers and vice versa.

Supply and sales have both returned to relatively normal levels. While supply has dropped down to prerecession levels,

home sales, particularly new home sales, have failed to do so.

Residential ConstructionNew and Existing Home Sales & Months of Supply

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Mon

ths

of S

uppl

y

Hom

es S

old

(Mill

ions

)

Sold Supply

0.02.04.06.08.010.012.014.0

0.0

2.0

4.0

6.0

8.0

Mon

ths

of S

uppl

y

Hom

es S

old

(Mill

ions

)

Sold Supply

New Homes Sold and Months of Supply

Existing Homes Sold and Months of Supply

New Homes Sold

Period % Change

Y-o-Y 8.4%

Existing Homes Sold

Period % Change

Y-o-Y 2.1%

Months of Supply

Period % Change

Y-o-Y 10.0%

Sources: St. Louis Fed, U.S. Bureau of the Census, National Association of Realtors





Construction aggregates (asphalt, cement, and ready-mix concrete) are all essential elements to building and

maintaining roads and highways. Companies that deal in building materials sell a sizeable amount of their products

to publicly funded projects. Therefore, government funding is an important driver for the industry, and companies

benefit when public spending increases. According to the chart below, Government Consumption and Investment (GCI)

has increased modestly by 0.3% over 4Q15 and 1.4% over 2015. The FAST Act has not had an immediate effect on

government spending, but it should increase its impact in the coming quarters.

In recent M&A news, Martin Marietta continued its acquisition activity in the West by acquiring Front Range Aggregates,

which is based in Colorado with total revenue of $310 million. This comes about six months after divesting California

assets that they had acquired in 2013 from TXI. Summit Materials also continued their growth strategy that relies largely

on acquisitions, paying $252 million for both Boxley Materials and American Materials, which operate in Virginia and the

Carolinas, respectively.

$2,650$2,700$2,750$2,800$2,850$2,900$2,950$3,000$3,050$3,100$3,150

$Billions

Sector Round-upBuilding Materials

Government Consumption and Investment

Government Consumption

and Investment

Period % Change

Q-o-Q 0.3%

Y-o-Y 1.4%

Sources: St. Louis Fed, U.S. Bureau of Economic Analysis





The yield on 10-Year Treasury Bonds can indirectly affect the road contracting industry. Higher interest rates make

construction projects more expensive to undertake. When yields on the 10-Year Treasury are low and stable, the

construction industry experiences increased investment and volume. As seen in the chart below, the 10-year yield has

decreased in the past quarter, causing a year-over-year decline as well. The strength of the dollar has caused concern

amongst the Fed in raising rates, but this usually has less of a long-term impact because many other levers affect the

dollar. The Fed’s interest in encouraging investment since the recession has depressed yields for a long time, but its

raising of the Fed funds rate indicates a shift in this strategy. This change could cause higher borrowing costs and a

potential headwind for the industry.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Sector Round-upRoads, Bridges & Highways

Yield on 10-Year Treasury

Yield on 10-Year Treasury

Period % Change

Q-o-Q -35 BPS

Y-o-Y -15 BPS

Sources: St. Louis Fed, Board of Governors of the Federal Reserve (US)





Corporate profit is essential for companies not only to survive, but to grow and expand. When corporate profit increases,

companies are more willing and able to open new branches and divisions of business. These additions lead to more

commercial construction. According to the chart below, corporate profit increased this quarter despite being down

overall for the year. While conditions are improving domestically, global macroeconomic conditions are limiting growth in

corporate profit, which is causing a mixed signal for nonresidential construction.

$0$200$400$600$800

$1,000$1,200$1,400$1,600$1,800$2,000

$Billions

Sector Round-upNonresidential Construction

Corporate Profit

Corporate Profit

Period % Change

Q-o-Q 1.9%

Y-o-Y -3.6%

Source: St. Louis Federal Reserve





Announce Date

Industry Subsector Target/Issuer Buyers/Investors Description

March 21 Nonresidential Ardent Services, LLC EMCOR Group Inc.Provides electrical and instrumentation services to the energy infrastructure market in the US.

March 21 NonresidentialRabalais Constructors, LLC

EMCOR Group Inc.Provides electrical and instrumentation services to the energy infrastructure market in the US.

February 23 Building MaterialsBoxley Materials Company, Inc.

Summit Materials, Inc.Product lines include ready-mixed concrete, crushed stone, asphalt, and other construction materials.

February 11 Building MaterialsAmerican Materials Company

Summit Materials, Inc.Manufactures and markets sand and gravel to customers in the Carolinas.

February 9 Building MaterialsFront Range Aggregates LLC

Martin Marietta Materials, Inc.

Engages in production and supply of construction aggregates and landscaping materials in Colorado.

January 13 Nonresidential Weatherly Inc. KBR, Inc. Builds nitric acid plants.

January 13 Nonresidential Plinke GmbH KBR, Inc. Designs and manufactures acid processing plants.

January 13 NonresidentialChematur Ecoplanning Oy

KBR, Inc. Designs, develops, and constructs processing plants for the processing and chemical industry.

January 8 Home BuildingAcadia Homes & Neighborhoods LLC

Taylor Morrison Home Corporation

Offers homebuilding services based in the Atlanta area.

Source: Capital IQ

Mergers and Acquisitions





Ticker Exchange

Stock Price at 3/31/16

LTM Price Range

Enterprise Value

LTMLTM

Margin EBITDA/

Rev.

LTM MultipleForward Multiples

High Low Rev. EBITDA EV/Rev. EV/EBITDAEV/

EBITDA

Residential

Beazer Homes USA Inc. BZH NYSE $8.72 $21.19 $6.07 $1,602.00 $1,792.35 $37.97 2% 1.0x 30.4x 12.6x

Comstock Holding Companies, Inc. CHCI Nasdaq 1.79 6.65 1.40 47.80 60.77 (0.36) -1% 1.3x NM 0.0x

DR Horton Inc. DHI NYSE 30.23 33.10 22.97 13,646.21 11,307.60 1,308.80 12% 1.2x 10.9x 9.0x

Hovnanian Enterprises Inc. HOV NYSE 1.56 3.76 1.19 2,252.63 2,278.37 90.85 4% 1.0x 24.4x 10.2x

KB Home KBH NYSE 14.28 17.42 9.04 3,647.33 3,130.28 168.95 5% 1.2x 22.0x 13.7x

Lennar Corporation LEN NYSE 48.36 56.04 37.14 16,550.51 9,823.53 1,200.30 12% 1.6x 12.3x 10.0x

LGI Homes, Inc. LGIH Nasdaq 24.21 36.07 16.27 766.27 672.01 87.61 13% 1.2x 9.2x 7.2x

MDC Holdings Inc. MDC NYSE 25.06 31.23 19.28 1,967.95 1,928.29 114.64 6% 1.0x 17.1x 12.3x

NVR, Inc. NVR NYSE 1,732.40 1,820.00 1,292.11 7,016.74 5,355.36 687.84 13% 1.3x 10.7x 9.5x

PulteGroup, Inc. PHM NYSE 18.71 22.95 14.61 8,698.68 6,281.24 866.63 14% 1.4x 9.7x 8.1x

Toll Brothers Inc. TOL NYSE 29.51 42.19 23.75 8,012.87 4,246.36 503.01 12% 1.9x 15.2x 8.4x

Median $24.21 $31.23 $16.27 $3,647.33 $3,130.28 $168.95 12% 1.2x 13.7x 9.5x

Average $175.89 $190.05 $131.26 $5,837.18 $4,261.47 $460.57 8% 1.3x 16.2x 9.2x

All figures reported in millions, except per share data

Source: Capital IQ

Bellwether Stocks & Industry Participants





Ticker Exchange


LTM Price Range

Enterprise Value

LTMLTM

Margin EBITDA/

Rev.



EBITDA

Building Materials

Eagle Materials Inc. EXP NYSE $70.11 $88.81 $45.03 $3,959.43 $1,143.49 $328.86 29% 3.5x 11.2x 9.6x

Martin Marietta Materials, Inc. MLM NYSE 159.51 178.67 108.31 11,990.01 3,370.20 825.59 24% 3.6x 15.2x 12.3x

MDU Resources Group Inc. MDU NYSE 19.46 23.12 15.58 5,826.27 4,234.35 504.31 12% 1.4x 11.6x 10.0x

Summit Materials, Inc. SUM NYSE 19.45 28.57 13.12 2,245.68 1,432.30 283.68 20% 1.6x 7.9x 6.3x

US Concrete, Inc. USCR Nasdaq 59.58 63.67 32.58 1,173.65 1,048.42 127.38 12% 1.2x 9.9x 7.4x

Vulcan Materials Company VMC NYSE 105.57 106.84 78.83 15,896.33 3,545.62 897.97 25% 4.6x 19.1x 14.8x

Cemex SAB de CV (ADR) CX NYSE N/A N/A N/A N/A N/A N/A 19% 2.0x 10.3x 0.0x

CRH PLC (ADR) CRH NYSE N/A N/A N/A N/A N/A N/A 9% 1.2x 12.4x 0.0x

HeidelbergCement HEI GR N/A N/A N/A N/A N/A N/A 17% 1.5x 8.1x 7.2x

LafargeHolcim Group LHN VTX N/A N/A N/A N/A N/A N/A 5% 2.1x 37.2x 8.3x

Median $64.85 $76.24 $38.80 $4,892.85 $2,401.25 $416.58 18% 1.8x 11.4x 7.9x

Average $72.28 $81.61 $48.91 $6,848.56 $2,462.40 $494.63 17% 2.3x 14.3x 7.6x

Roads, Bridges, and Highways

Granite Construction Inc. GVA NYSE $47.80 $47.99 $28.45 $1,687.73 $2,390.23 $153.64 6% 0.7x 10.2x 8.6x

Sterling Construction Co STRL Nasdaq 5.15 6.66 3.05 118.93 632.48 13.10 2% 0.2x 26.6x 4.5x

Tutor Perini Corporation TPC NYSE 15.54 24.74 10.16 1,497.74 4,939.38 170.97 3% 0.3x 10.3x 6.0x

Median $15.54 $24.74 $10.16 $1,497.74 $2,390.23 $153.64 3% 0.3x 10.3x 6.0x

Average $22.83 $26.46 $13.89 $1,101.47 $2,654.03 $112.57 4% 0.4x 15.7x 6.4x


Source: Capital IQ


Note: CX, CRH, HEI, and LHN report in foreign currency. Margin and multiples unaffected and shown for analysis.





Ticker Exchange


LTM Price Range

Enterprise Value

LTMLTM

Margin EBITDA/

Rev.



EBITDA

Nonresidential

Aecom Technology Corporation ACM NYSE $30.79 $35.40 $22.80 $8,707.61 $17,952.16 $1,014.53 6% 0.5x 8.0x 8.1x

Chicago Bridge and Iron Company N.V. CBI NYSE 36.59 59.45 31.30 5,823.01 12,471.49 1,154.60 9% 0.5x 5.1x 6.2x

Dycom Industries Inc. DY NYSE 64.67 90.82 45.45 2,725.23 2,289.58 307.29 13% 1.2x 8.9x 6.9x

EMCOR Group Inc. EME NYSE 48.60 52.37 40.98 2,869.84 6,874.51 364.14 5% 0.4x 7.7x 7.4x

Fluor Corporation FLR NYSE 53.70 62.26 39.48 7,434.10 17,989.29 1,075.81 6% 0.4x 5.8x 6.1x

Jacobs Engineering Group Inc. JEC NYSE 43.55 48.25 34.76 5,582.25 11,775.76 714.99 6% 0.5x 7.8x 8.1x

MasTech, Inc. MTZ NYSE 20.24 21.52 12.44 2,635.06 4,179.29 232.37 6% 0.6x 10.9x 6.3x

Quanta Services, Inc. PWR NYSE 22.56 30.61 16.77 3,860.35 7,424.79 457.67 6% 0.5x 8.0x 6.8x

Median $40.07 $50.31 $33.03 $4,721.30 $9,600.27 $586.33 6% 0.5x 7.9x 6.9x

Average $40.09 $50.09 $30.50 $4,954.68 $10,119.61 $665.18 7% 0.6x 7.8x 7.0x


Source: Capital IQ




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mercer capital's value focus: construction industry | q1 2016

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