Capstone Points to Sustained Demand and M&As as Indicators for Building ProductsDecember 7th, 2020 by Drew Vass
Independent investment banking firm Capstone Headwaters is among the latest pointing to rising demand and mergers and acquisitions (M&As) activities as indicators for long-term demand among building products. M&A activities among building-product-related companies has steadily improved, the firm reports, rising over 100% from second- to third-quarter 2020, after “coming to a near pause” in the second quarter. Meanwhile, demand for products was temporarily hushed by a period of material shortages and supply chain issues, but the market has shown sustained recovery, analysts say. Other key indicators include timelines for construction projects that resemble a norm prior to the COVID-19 pandemic.
“The substantial increase in prospective home buyers has manifested in elevated single-family home sales, as building products participants work to procure inventory to meet the backlog of activity,” the firm reports. As backlogs decrease for commercial projects, analysts point to residential as the primary consumer of products for the immediate future.
For the residential market, analysts highlight September as a mark of sustained rebound, when single-family sales rose by 32% on a year-over-year basis. As inventory levels remain below a four-month’s supply and home prices continue to appreciate, the expectation is for additional gains, they add. Analysts also point to the National Association of Home Builders’ Remodeling Market Index (RMI), which grew substantially in the third quarter of 2020, driven primarily by what they label “smaller scale projects.” Projects in the sub-$20,000 range, “have contributed meaningful gains,” a recent report suggests and will remain key going forward.
Among prices for materials used in doors, windows and related projects, a recent report shows glass registering as one of the more stable, according to the Bureau of Labor Statistics’ producer price index. Meanwhile, plywood and softwood lumber posted the largest increases, which Capstone’s analysts attribute to reduced capacity at lumber mills forced to conform with social distancing and stay-at-home orders, along with tariffs on lumber imported from Canada. Both work to exacerbate supply issues, they say, as the average price for lumber has risen to $30,470 for construction of single family homes, increasing by around $16,000 since April.
Among the M&As used as notable indicators for building products is The Home Depot’s re-acquisition of HD Supply and the merger of Builders FirstSource with BMC Stock Holdings. The company also cites the acquisition of Quincaillerie Lion, a distributor of door and window hardware, by Richelieu Hardware. According to Capstone’s recent report, Richelieu recorded “heightened sales increases in Q3, with revenue rising 15.6% year over year, supported by strong demand in the renovation market …” The firm also cites the acquisition of door and window dealer Paradise Home Improvement in September, suggesting that private equity “has also demonstrated sustained appetite in the subsector.” Other door and window-related activities include the acquisition of hardware provider Constructive Resource Group by Unified Door and Hardware, window provider Hall Building Products by Reddi Industries, and distributor Modern Builders Supply by SiteOne.
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