Betting On Success: How the Latest Developments Spell Good News for the Industry
By Michael Collins
Whenever the overall building products industry or the fenestration segment encounters uncertainty, the same questions arise. Will the market be strong this year? Are we due for a correction? Are we seeing lower year-over-year numbers because the first quarter of 2023 had some residual COVID bump momentum, or is the market softening?
These are all reasonable questions and, as valuable as correct answers to them would be, they can only really be answered by tearing days off the calendar and seeing how the year unfolds.
That being said, we can’t operate as if there is no reliable way to assess the future tempo of the industry. “… we can’t operate as if there is no reliable way to assess the future tempo of the industry.”
We consistently focus on the large capital decisions made by some of the most prominent players in building products. Some of the signals we’re receiving from large players present a cautious picture, such as JELD-WEN’s recent announcement that they are closing two window manufacturing plants in California and Wisconsin. Plant closures are usually the harbinger of impending softness in the market. Still, with a company as large as JELD-WEN, decisions like this can be more about rationalization and product line changes than a pessimistic market outlook.
Whatever the case with those plant closure decisions may be, we continue to see several large and very encouraging capital commitments in the industry. One interesting example was the recent purchase of SRS Distribution by The Home Depot. This $18.25 billion transaction was Home Depot’s largest ever and was attention-getting, both for its sheer size and the rich valuation it implied for SRS. Home Depot is “all in” on the building products and home improvement segments and lacks some side business that would mean an intention to venture onto another path. There is nothing, however, that forces Home Depot to make such a massive acquisition in this segment unless they feel that it is an excellent opportunity for future growth and profitability.
Elsewhere In the Industry
Another recent announcement presents a strong signal and a large bet on the building products industry. This came in the form of successful rental industry veteran Brad Jacobs and his recent formation of QXO. While QXO hasn’t begun operating yet, the company will serve as an acquisition platform that Jacobs believes he can build into a $50 billion company. He announced his intention to focus on acquiring and growing building product distribution businesses. Just as was the case with SRS, companies that find themselves on the radar of interested acquirers are those that have developed a unique and defensible customer niche, business model, or specialized set of capabilities. QXO will endeavor to identify and capitalize on such opportunities and represents a major positive bet on our industry segment.
In addition to the positive financial bets represented by various industry acquisitions, another recent meaningful commitment was RoyOMartin’s announcement that they will invest $30 million in their manufacturing facility in Louisiana for oriented strand board (OSB). The purpose of the investment is to upgrade the efficiency of its manufacturing equipment. OSB is sold at narrower margins than doors or windows, so producers in that segment are particularly aware of their manufacturing efficiency. That being said, the use of OSB is so widespread in the building industry that the material comes to have the same predictive power of future building activity. This manufacturing improvement and others announced in recent months are welcome bets on the bright future of the industry in the next couple of years.
Michael Collins is an investment banker and a partner in EquiNova Capital Partners. He specializes in mergers and acquisitions in the door and window industry.
mcollins@buildingia.com
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