mercer capital's value focus: construction industry | q4 2015

BUSINESS VALUATION & FINANCIAL ADVISORY SERVICES

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

Sector Focus: Nonresidential Construction 4

Trade-Weighted Index 5Yield on 10-Year Treasury 6Manufacturing Capacity Utilization 7Private Investments in Manufacturing Structures 8Office Rental Vacancy 9Corporate Profit 10

Sector Round-up Residential Construction 11Building Materials 13Roads, Bridges and Highways 14

Mergers and Acquisitions 15

Bellwether Stocks & Industry Participants 16

About Mercer Capital 19

www.mercercapital.com

VALUE FOCUS

Fourth Quarter 2015

Construction & Building Materials

SEGMENT FOCUS Nonresidential Construction

EXECUTIVE INDUSTRY TRENDS

• The FAST Act will provide $305 billion in transportation

infrastructure funding for a guaranteed period of 5 years

• The Fed’s rate hike in Q4 reversed a trend of declining treasury

yields, potentially signaling an increase in financing costs

• Stagnating and declining put-in-place measures

• Vacancy rates demonstrate potential demand as corporate profit

slides and financing costs increases

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© 2015 Mercer Capital // www.mercercapital.com 1

Mercer Capital’s Value Focus: Construction & Building Materials Fourth Quarter 2015

GDP rose 3.1% over the past twelve months, falling within 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 4.1% of GDP this past quarter. These are

signs the economy, including the construction industry, are healthy and returning to normal levels. Construction lagged

behind the rest of the economy, particularly in the years following the decline of 2009, but since then it has steadily

recovered, marked by a 10.5% 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

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: Tradingeconomics.com | U.S. Bureau of Economic Analysis

Construction

Period % Change

Q-o-Q 2.6%

Y-o-Y 10.5%

National

Period % Change

Q-o-Q 0.6%

Y-o-Y 3.1%





According to the Federal Reserve, a healthy economy typically has an unemployment rate between 4.5% and 6.0%. The

current level of 5.0% represents strength in the economy, after decreasing steadily from 5.6% 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 is currently 7.5%, down from 8.3% a year ago.

This represents an overall strengthening of the industry. Entering the colder months of the next quarter, this number will

most likely rise, but not drastically. Lower unemployment rates suggest an increase of activity within the industry.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

National Construction

Note: The national unemployment rate is seasonally adjusted, but the construction unemployment rate is not in order to show seasonality and recent trends. Source: U.S. Bureau of Labor Statistics

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 U.S.

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 13.3% for residential and by 5.9% for nonresidential. Despite

strong yearly growth, both are stagnating or even declining this quarter with residential construction experiencing no

growth and nonresidential construction decreasing by 2.7%. The lower figures are likely due to stabilization after two

quarters of rapid growth. Higher levels of put-in-place construction suggest increasing 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 0.0%

Y-o-Y 13.3%

Nonresidential

Period % Change

Q-o-Q -2.7%

Y-o-Y 5.9%





Nonresidential construction is largely trending upwards, bolstered by increases in the infrastructure and commercial

building sectors. Office vacancy rates are low, which typically indicates a need for private investment in office space. The

public investment outlook is strong now due to a recent federal government budget approval and the FAST Act. In early

December, President Obama signed the long-awaited highway funding bill into law, providing $305 billion to fixing roads

and bridge construction across the country for a guaranteed period of five years. While the dollar amount is important,

the certainty of funding provided could potentially have a greater impact. Local and state governments can now continue

to fund their backlogged projects that were held up due to lack of long-term funding.

Oil prices have significantly declined with no foreseeable recovery in sight. To combat this, oil and gas companies have

been forced to reduce capital expenditures. While many companies’ balance sheets are stressed, they are still producing

large quantities of oil. Most of their costs are incurred on the front end, so they continue to produce, accepting reduced

prices. In response, nonresidential construction companies operating within the energy sector have pivoted away from

delivering new large structures, opting instead to focus on maintaining current ones. If oil prices remain suppressed,

companies will continue to decrease their rig count, yet continue running some rigs, which will continue to require

maintenance and repairs from construction companies. In addition to this switch, construction companies are relying on

their own diversity as well as shifting focus towards refineries to weather the plunge in oil prices. Prices were as low as

$34.73 per barrel for the quarter, only 18 months after being at $107.26 in June of 2014.

The strong dollar has negatively affected nonresidential construction companies operating globally. When the dollar is

strong, imports become cheaper and exports become more expensive, which decreases foreign demand for American

companies doing business both at home and abroad. Fluor and Jacobs, the two biggest players in the industry, have lost

significant revenue due to foreign exchange rates. Fluor’s backlog lost $3 billion in value due to the strong dollar in the

past year, and Jacob’s sales decreased in value by $100 million in the last quarter alone. This led companies to report

their financials on a constant currency basis to give a more accurate depiction of the company’s underlying performance

before the impact of foreign currency.

The nonresidential construction sector has continued to focus on winning bids to increase backlogs, which are a

significant indicator of future revenue. An influx of projects coming down the pipeline has bolstered backlogs and book

to burn rates. Companies feel less pressure to squeeze margins in order to win bids in this environment. Project mix is

also a considerable concern, and companies are trending towards higher margins in their backlogs, even factoring in

building construction which is on the rise and tends to have smaller margins due to contractual logistics involved with

using subcontractors.

Sector FocusNonresidential Construction





The Trade-Weighted Index measures the relative strength of the U.S. dollar in comparison to foreign currencies, putting

an emphasized weight on both the most common trade partners and largest economies. When the dollar is strong,

imports become cheaper and exports become more expensive. A 10.9% year-over-year increase in TWI has made the

dollar stronger than it has been in the past ten years, which has increased the cost for other countries to purchase U.S.

building materials and services, decreasing sales volume and weakening the industry.

Nonresidential ConstructionTrade-Weighted Index

Trade-Weighted Index

80

90

100

110

120

130

Source: St. Louis Fed | Board of Governors of the Federal Reserve (US)

Trade-Weighted Index

Period % Change

Q-o-Q 1.7%

Y-o-Y 10.9%





The yield on 10-Year Treasury Bonds acts as a proxy for how expensive it is to finance construction projects. Growth

in the nonresidential construction industry could be adversely affected by the current rising interest rates. It should be

noted, however, that flight to safety during gloomy macroeconomic times can depress yields. An increase in yields raises

the cost of investment, but it can also signify increasing optimism, which leads to more spending in the construction

industry. In recent years, yields have been relatively volatile but trending downwards. The 7 basis point bump in the past

quarter was greater than the relatively small year-over-year increase. This trend could mean higher financing costs in

the future, and therefore, decreased demand for the industry.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Source: St. Louis Fed | Board of Governors of the Federal Reserve (US)

Nonresidential ConstructionYield on 10-Year Treasury

Yield on 10-Year Treasury

Yield on 10-Year Treasury

Period % Change

Q-o-Q 7 BPS

Y-o-Y 3 BPS





Manufacturing capacity utilization (MCU) has increased steadily since the sharp decline of 2009. It is the ratio of how

much manufacturing activity is present relative to the capacity level of output. Increasing MCU is usually accompanied

by higher long-term interest rates; high interest rates make firms less likely to invest in more capital as it becomes

more expensive. Instead of expanding operations, companies then are more likely to increase output levels at existing

facilities, driving up utilization. MCU is expected to continue to grow modestly through 2021.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Source: IBIS World | Federal Reserve

Nonresidential ConstructionManufacturing Capacity Utilization

Manufacturing Capacity Utilization

Manufacturing

Capacity Utilization

Period % Change

Y-o-Y -1.1%





Private investment in manufacturing structures is a measure of how much money businesses are spending on new

and existing structures. Optimism in the overall economy has helped investment levels rebound after recession years.

Businesses are more willing to invest in capital expenditures, but problems still exist. Outsourcing will continue to be an

industry road block considering the current strength of the dollar. Additionally, interest rates are expected to increase,

which raises the cost of financing large projects.

$0

$20

$40

$60

$80

$100

$120$Billions

Source: IBIS World | U.S. Bureau of Economic Analysis

Nonresidential ConstructionPrivate Investments in Manufacturing Structures

Private Investments in Manufacturing Structures

Private Investment in

Manufacturing Structures

Period % Change

Y-o-Y 48.3%





Office rental vacancy can be a signal for new commercial construction demand. Low vacancy rates indicate a need

for more space for companies to conduct business, which is a boon for the nonresidential construction industry. The

downward trend indicates a potential future demand for inventory.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Source: IBIS World | Cushman and Wakefield

Nonresidential ConstructionOffice Rental Vacancy

Office Rental Vacancy

Office Rental Vacancy

Period % Change

Y-o-Y -64 BPS





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. These additions lead to an increase in

commercial construction.

The prior chart (office rental vacancy) coupled with the chart below seems to give opposite results. A 4% decrease in

office rental vacancy means investment is likely needed to increase the amount of overall office space. A main indicator

of the availability of funds for this investment, however, is corporate profit which has declined. So, while there is a need

for more investment, there is relatively less internal funding available to fund such growth.

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000$Billions

Source:St. Louis Federal Reserve

Nonresidential ConstructionCorporate Profit

Corporate Profit

Corporate Profit

Period % Change

Q-o-Q -8.1%

Y-o-Y -3.6%





The National Association of Home Builders uses surveys to produce two indices on the confidence level within the

homebuilding industry. For both surveys, respondents are asked to rate market conditions, with 50 being the index

average. Both indices show clear declines due to the housing crisis, but they have steadily increased, and both have

been above 50 since the middle of 2014. After reaching a 10-year high in October, HMI slumped slightly for the remainder

of the quarter. Moving in the exact opposite direction, RMI has gone up slightly this quarter but is down for the year.

While there will likely be fluctuations in both going forward, it is a good sign as long as these indices are above average.

0

10

20

30

40

50

60

70

80

90

100

HMI RMINote: RMI is measured quarterly and approximated for a monthly basis using a straight-line approach. Source: National Association of Home Builders

Sector Round-upResidential Construction

NAHB Housing Market and Remodeling Market Indices

NAHB HMI

Period % Change

Q-o-Q -1.6%

Y-o-Y 3.4%

NAHB RMI

Period % Change

Q-o-Q 1.2%

Y-o-Y -3.3%





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

06Q1 to 09Q1. 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 below, all levels of permits and

starts have increased over the past year.

Sector Round-upResidential Construction(continued)

Seasonally Adjusted Annualized Rates of New Housing Starts and Building Permits

Millions of Units

Private Housing Starts

Period % Change

Q-o-Q -4.8%

Y-o-Y 6.4%

Single Family Starts

Period % Change

Q-o-Q 3.6%

Y-o-Y 6.1%

Private Building Permits

Period % Change

Q-o-Q 9.0%

Y-o-Y 11.8%

Single Family Building Permits

Period % Change

Q-o-Q 5.5%

Y-o-Y 6.9%

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





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, GCI has stagnated this quarter with no growth, but it has still

increased 1.1% over the past year. If it continues to stagnate as in this previous quarter, the industry will experience

decreased levels of demand. This is not expected to happen because of the favorable impact of the FAST Act should

have on road construction.

$2,650

$2,700

$2,750

$2,800

$2,850

$2,900

$2,950

$3,000

$3,050

$3,100

$3,150

$Billions

Source: St. Louis Fed | U.S. Bureau of Economic Analysis

Sector Round-upBuilding Materials

Government Consumption and Investment

Government Consumption

and Investment

Period % Change

Q-o-Q 0.0%

Y-o-Y 1.1%





The yield on 10-Year Treasury Bonds, as shown in an earlier graph, 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 project volume. When interest rates are

high, it is more expensive for the public sector to finance industry projects such as road building. The 10-Year yield has

increased more in the past quarter than the past year. If this trend continues, borrowing costs will increase for projects,

and the government will not be able to fund as many roads with the money provided by the FAST Act.

Without funding, construction projects cannot be completed. Much of this funding comes from public resources, so the

industry must always be concerned with the level of government spending on construction activity. Government funding

for highways is expected to increase significantly, as demonstrated in the below graph, despite a small decrease from

the previous year. This is in large part due to the expected long-term congressional funding bill for highway repairs and

construction.

$0

$50

$100

$150

$200

$250

$300

$Billions

Source: IBIS World | Bureau of Economic Analysis

Sector Round-upRoads, Bridges and Highways

Government Funding for Highways

Government Funding for

Highways

Period % Change

Y-o-Y -2.1%





Announce Date

Industry Subsector Target/Issuer Buyers/Investors Seller Description

December 16 Home Building JW Homes, LLC PulteGroup Inc. Wheelock StreetBuilds new homes, townhomes, and neighborhoods for home buyers in big cities in GA, SC, TN, and NC.

December 7 NonresidentialJ.L. Patterson & Associates, Inc.

Jacobs Engineering Group Inc.

Provides engineering design, construction manage-ment, and staff augmentation services among many others in the public and private sector across the U.S.

November 5 NonresidentialKBR, Inc., Infrastructure Americas Division

Stantec Inc. KBR, Inc.Divestiture of division that provides construction and engineering services in the U.S.

October 28 Home BuildingHans Hagen Homes, Inc.

M/I Homes, Inc.Operates as a home builder in Minnesota and Western Wisconsin offering home communities to families.

October 28 Building MaterialsHeavy Materials, LLC and Spartan Concrete Products, LLC

U.S. Concrete, Inc.Both manufacture ready-mixed concrete and aggregates in the U.S.

Source: Capital IQ

Mergers and Acquisitions





Ticker Exchange

Stock Price at 12/31/15

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 $11.49 $21.19 $11.18 $1,726.47 $1,706.10 $53.28 3% 1.0x 33.1x 11.3x

Comstock Holding Companies, Inc. CHCI Nasdaq 1.46 7.84 1.41 45.64 61.38 (0.09) 0% 1.2x NM 0.0x

DR Horton Inc. DHI NYSE 32.03 33.10 22.12 14,327.06 10,937.80 1,249.20 11% 1.3x 11.6x 11.6x

Hovnanian Enterprises Inc. HOV NYSE 1.81 4.27 1.37 2,358.98 2,148.48 80.21 4% 1.1x 28.0x 14.8x

KB Home KBH NYSE 12.33 17.42 11.76 3,201.74 3,032.03 163.25 5% 1.2x 22.8x 21.2x

Lennar Corporation LEN NYSE 48.91 56.04 41.25 16,193.29 9,474.01 1,162.72 12% 1.7x 13.2x 10.4x

LGI Homes, Inc. LGIH Nasdaq 24.33 36.07 12.21 757.44 630.24 82.69 13% 1.2x 9.7x 8.9x

MDC Holdings Inc. MDC NYSE 25.53 31.23 23.87 1,955.47 1,909.04 113.21 6% 1.1x 18.4x 13.5x

NVR, Inc. NVR NYSE 1,643.00 1,721.95 1,187.84 6,630.80 5,168.45 647.66 13% 1.3x 11.2x 10.9x

PulteGroup, Inc. PHM NYSE 17.82 23.36 17.08 7,910.76 5,981.96 835.90 14% 1.3x 10.2x 8.5x

Toll Brothers Inc. TOL NYSE 33.30 42.19 32.19 8,671.69 4,171.25 505.80 12% 2.1x 16.5x 16.6x

Median $24.33 $31.23 $17.08 $3,201.74 $3,032.03 $163.25 11% 1.2x 14.8x 11.3x

Average $168.36 $181.33 $123.84 $5,798.12 $4,110.98 $444.89 8% 1.3x 17.5x 11.6x

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 $60.43 $88.81 $58.13 $3,509.28 $1,115.14 $311.74 28% 3.1x 9.9x 9.7x

Martin Marietta Materials, Inc. MLM NYSE 136.58 178.67 104.15 10,451.15 3,268.12 767.43 23% 3.2x 13.5x 12.8x

MDU Resources Group Inc. MDU NYSE 18.32 24.51 16.15 5,548.46 4,191.55 498.96 12% 1.3x 6.8x 10.8x

Summit Materials, Inc. SUM NYSE 20.04 28.57 17.53 2,329.02 1,364.92 216.60 16% 1.7x 10.1x 8.4x

US Concrete, Inc. USCR Nasdaq 52.66 62.82 25.02 1,049.54 974.72 117.90 12% 1.2x 10.2x 8.3x

Vulcan Materials Company VMC NYSE 94.97 106.84 64.28 14,357.71 3,422.18 826.25 24% 4.4x 19.4x 17.9x

Cemex SAB de CV (ADR) CX NYSE N/A N/A N/A N/A N/A N/A 19% 1.7x 9.4x 0.0x

CRH PLC (ADR) CRH NYSE N/A N/A N/A N/A N/A N/A 9% 1.2x 13.4x 0.0x

HeidelbergCement HEI GR N/A N/A N/A N/A N/A N/A 17% 1.6x 8.5x 8.4x

LafargeHolcim Group LHN VTX N/A N/A N/A N/A N/A N/A 5% 2.5x 13.6x 9.5x

Median $56.55 $75.82 $41.58 $4,528.87 $2,316.52 $405.35 17% 1.7x 10.1x 9.0x

Average $63.83 $81.70 $47.54 $6,207.53 $2,389.44 $456.48 17% 2.2x 11.5x 8.6x

Roads, Bridges, and Highways

Granite Construction Inc. GVA NYSE $42.91 $44.40 $28.45 $1,477.73 $2,371.03 $160.33 7% 0.7x 10.4x 9.9x

Sterling Construction Co STRL Nasdaq 6.08 6.66 2.23 135.88 623.60 4.46 1% 0.2x NM 19.8x

Tutor Perini Corporation TPC NYSE 16.74 26.71 14.95 1,569.47 4,920.47 147.03 3% 0.3x 7.8x 7.2x

Median $16.74 $26.71 $14.95 $1,477.73 $2,371.03 $147.03 3% 0.3x 9.1x 9.9x

Average $21.91 $25.92 $15.21 $1,061.03 $2,638.37 $103.94 3% 0.4x 9.1x 12.3x


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 $30.03 $35.40 $24.04 $8,615.91 $18,077.06 $987.27 5% 0.5x 7.7x 8.7x

Chicago Bridge and Iron Company N.V. CBI NYSE 38.99 59.45 32.16 6,625.90 12,929.50 1,228.80 10% 0.5x 5.0x 5.2x

Dycom Industries Inc. DY NYSE 69.96 90.82 30.66 2,892.21 2,171.19 288.96 13% 1.3x 10.0x 8.9x

EMCOR Group Inc. EME NYSE 48.04 52.37 39.83 2,848.69 6,718.73 362.10 5% 0.4x 8.2x 8.1x

Fluor Corporation FLR NYSE 47.22 62.26 40.61 5,648.76 18,114.05 1,116.11 6% 0.3x 4.7x 5.0x

Jacobs Engineering Group Inc. JEC NYSE 41.95 48.25 36.05 5,364.46 12,114.83 750.48 6% 0.4x 7.1x 7.5x

MasTech, Inc. MTZ NYSE 17.38 22.79 14.48 2,410.41 4,208.33 250.12 6% 0.6x 8.9x 8.6x

Quanta Services, Inc. PWR NYSE 20.25 30.61 18.46 3,591.08 7,572.44 497.25 7% 0.5x 5.5x 6.9x

Median $40.47 $50.31 $31.41 $4,477.77 $9,843.63 $623.86 6% 0.5x 7.4x 7.8x

Average $39.23 $50.24 $29.54 $4,749.68 $10,238.27 $685.13 7% 0.6x 7.1x 7.4x


Source: Capital IQ




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