Trend Tracker Jun/Jul 2018

June 28th, 2020 by Nathan Hobbs

The Market Flexes Its Muscles

It’s Getting Stronger, and It’s Ready to Lift the Industry

By Michael Collins

Given the overall strong health of the building and construction industry, it is considered a headline-worthy event when one or a few leading economic indicators flick-er from a positive to a negative reading. However, when scores of different indicators are used to measure the health of an economy as diverse and complex as ours, it is inevitable that readings will occasionally trend negative. The most important measures of the continuing strength of the recovery, though, currently indicate strong sup-port for the door and window market.

At the macro level, consumer confidence reached a 17-year high in May as the current situations index reached levels last seen in March 2001. The confidence score was driven by the strong labor market and a prevailing feeling of job security and ease of switching jobs when desired. Increasing gas prices and higher mortgage costs had a dampening effect on the score but not enough to prevent setting a nearly two-decade high water mark.

M&A Marches On

Recent door and window-related merger & acquisition (M&A) activity has shown the same reserved pace that we have seen in the past several years but indicates another strong endorsement of the outlook for our segment. The acquisitions completed highlight several fundamental trends in the industry. Currently, there is a strong emphasis on buying companies that serve the high-end segment. Wasco, a manufacturer primarily of commercial skylights, was acquired by Velux, and Metal Window Corp., a maker of custom, high-end aluminum doors and windows, was bought by Arcadia Inc. These deals were centered in the higher end of the commercial and residential segments, respectively.

Another residential deal in the high-end category was Andersen’s acquisition of Heritage Windows and Doors. It continued a series of region-al high-end window manufacturer purchases that have taken place over the past several years.

It is easy to question how a company the size of Andersen can expect to move the needle by buying a much smaller manufacturer. In addition to the unique management talent that often proliferates in nimble, entrepreneurial businesses, these companies have figured out a key element in the product pricing realm. A company cannot fool high-end homeowners or builders into paying more for a product that is not truly differentiated and well worth the additional expense. Any company that sells into the high-end segment has best practices and design and manufacturing methodologies that can benefit even the largest firms in the industry.

Last but not least was the completion of the Ply Gem and Atrium dual acquisition by Clayton, Dubilier & Rice, which created a $2.4 billion revenue giant in the industry. Since both offer products along a wide price spectrum, this deal can’t be viewed as a pure play on the high-end segment. Rather, it is a giant bet on the residential construction and remodeling industry.

Clayton is a highly successful PE fund and has attracted operating partners of the caliber of Jack Welch, former CEO of General Electric. They must be considered smart money, and we should be encouraged that they’ve moved their chess pieces in a way that will only pay off if the housing market continues to exhibit strong growth over the next several years and beyond.

A National Jobs Plan?

A wildcard with the potential to cause even the most optimistic projections of construction growth to seem tepid is the infrastructure package proposed by the administration. Including roughly $1.5 trillion in spending, this measure, if passed, would serve as a big driver of construction spending and overall economic growth. The spending would be phased in over a period of years, with roughly $400 billion to come by 2021. The Associated Builders and Contractors estimates that the plan would create roughly 2.6 million construction jobs between 2019 and 2021.

A pessimist might point out the likelihood that most of these positions would be difficult to fill in the current tight labor market. While that is true, an expansion of the H2B visa program allowing international workers to temporarily enter the U.S. would go a long way in helping fill these positions. Competitive market dynamics have already given rise to signing bonuses and higher pay nationally.

In any case, when the spending level is in the hundreds of billions and tops a trillion dollars in total, the market will find a way to put the required workers in the right spots to make it happen. If put in motion, the infra-structure plan will provide additional momentum over the next few years, just as it gets easier to question how long this positive ride can continue.

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.

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