Analysis, strategy, and insights for decision makers in the building products industry.
April 2019
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How Much Should Katerra, Entekra, and Off-Site Components Makers Figure into M&A Plans?
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By Michael Collins, Managing Director, BIA
When we put together a book describing a potential acquisition, we have a good idea of what investors typically want to know: data on the company’s revenues and profits, forecasts on market growth, assessments of management strength, and other building blocks of an attractive prospect. Increasingly over the past few months, though, we also have been asked about something else: how off-site component manufacturing and companies like Katerra and Entekra could affect the deal.
Our view is that those trends could matter notably, or not at all. It depends on how much the dealers’ and disruptors’ business models intersect.
Katerra is getting the most buzz of the three, having generated nearly 625,000 Google searches. It has drawn attention both for the whale-sized private investments it has landed and for its equally gargantuan vision of an integrated construction process that stretches from first vision to final punchlist (and even beyond, to remodeling rooms and sourcing products). Entekra regards itself as just as revolutionary, but it has generated less attention: just 24,600 Google searches for its name through 2019’s first quarter. Its vision is more modest, too: Its focus today is limited to assembling single-family production homes. And the talk about component manufacturing is much more diffuse, both in terms of who’s involved and what ultimately will be accomplished.
Should you care about these three? Here’s a quick guide.
First, Katerra’s current focus is multifamily housing, and its next targets are likely to be student housing and assisted living. Thus, if you sell to multifamily builders, you should pay attention now—less because Katerra will gobble up market share and more because its practices are sure to be studied, and then copied, by competitors.
Next, consider that Katerra’s sole manufacturing facility today is in Phoenix. The next one will be located in Tracy, Calif., near San Francisco Bay, and applications are under review to build a third plant in San Marcos, Texas, between San Antonio and Austin. If Katerra were to decide to get into single-family construction, you can expect it would affect Arizona, California, and Texas first.
Entekra, meanwhile, sells to single-family production builders. It currently operates only in Northern California but soon will open a second plant in Southern California. The biggest builders already have committed to buying just about everything Entekra produces. Thus, if you sell to production builders in California and perhaps Nevada, Entekra is a challenger. Elsewhere, just watch what Entekra does and imagine how its practices could affect your market.
Big dealers like BMC and Builders FirstSource are leading what appears to be a widespread trend to invest in truss and component manufacturing facilities. Surveys like one by the Home Innovation Research Labs indicate builders intend to use more roof trusses, wall panels, floor trusses in their homes. That said, except for trusses, the share of builders using precut framing, wall panels, or prebuilt floors isn’t expected to top 40% before 2025.
Perhaps the biggest determinant in whether you should care is this: Do you live in an area with lots of new homes being built? Last year, seven states accounted for more than half of the 852,000 permits for single-family dwellings. If you life in Texas, Florida, California, the Carolinas, Georgia, or Arizona, trends in new-home construction matter a lot. If you count your local building permit activity in dozens rather than hundreds of thousands, you’re better off focusing on custom home, remodeling, and retail sales.
Over the long term, component manufacturing and companies like Katerra and Entekra are a threat to dealers because they buy materials by the railroad car, use those materials frugally, and then use common carriers to take their output to a job site. That system negates the dealer service that buys materials in big quantities and then delivers smaller amounts of those materials to individual job sites. For the relatively few “stick yards” around, mainly in big home-building markets, that generate virtually all their revenues from moving lumber, this is a problem today.
But most dealers aren’t like that and they aren’t in the production-building game. For these dealers, Katerra and Entekra are interesting phenomena. But their rise shouldn’t make or break a deal.
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Crazy Weather Patterns Are Wreaking Havoc
With LBM Industry's Comps
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We expect that Beacon Roofing's
warning to shareholders
that bad weather will hurt its quarterly earnings won't be the only example of how Mother Nature is interfering with construction supply companies' operations.
In Beacon's case, the roofing specialist said March 25 that it expect to report an adjusted net loss of 45 to 55 cents per share. Analysts had been forecasting a loss of 25 cents per share. "Through mid-March, the harsh weather has negatively impacted 40% to 75% of our available selling days, depending on geography," president and CEO Paul Isabella said in a statement. "Higher than normal seasonal pressures have caused margins to decline more than anticipated during the quarter, and we have experienced difficulties in reducing variable expenses given the weather volatility.
Of course, precipitation arguably affects roofers more than any other type of contractor, so conditions might not be so dire at lumberyards and K+B operations. But we've been hearing anecdotal reports around the country about how last fall's wet weather in Texas, hurricanes in Florida and the Carolinas, the polar vortex earlier this year, the "bomb cyclone" storms in the Heartland, and floods in the Plains states all are disrupting business. For companies just about everywhere, year-over-year performance comparisons are likely to carry a big asterisk.
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All Too Often for Many Dealers Near Retirement Age, Cashing Out Is Solely About Assets
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By Craig Webb
President, Webb Analytics
If you're among the many owners of construction supply or manufacturing companies who daydream about what their company could earn in a bidding war, BizQuest.com's listings of building material dealers for sale is a sobering experience.
Above, you'll see details for 11 lumberyards and big hardware stores offered for sale on BizQuest during the past several months. For three of those 10, the total value of inventory, furniture, and real estate offered in the deal exceeds the asking price. And in a fourth case, the value beyond those assets is just $30,000.
There are exceptions, such as the dealer whose asking price tops seven times annual EBITDA. But for the most part, at this end of the mergers and acquisitions market, a deal is more about the buyer's ability to plunk down cash at closing than it is about the prospect's financial metrics. After all, most of these smaller operations are heavily dependent on the owner's product knowledge, customer base, and personality. In such cases, unless the owner agrees to stay on as an employee for a while, one of the most valuable assets--the company's goodwill--leaves with the gold watch. Sometimes, a member of the management team can come up with the funds to take over, but given the small size of these for-sale companies (they averaged a dozen employees each), the bench isn't deep.
It's possible that there are opportunities hidden inside some of these companies. A good adviser can spot them.
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Recent Dealer and Distributor Deals, Openings and Closures Show Lots of Greenfield Moves
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Take note of all the green pins on the map above. They mark the 25 locations where a construction supply company is opening a location where none had existed previously. That's two-thirds more than the 15 greenfield locations opened by this time in 2018. Equally notable is that roofing specialty firms account for 19 of those 25 openings.
SRS
alone announced 10 new stores, follows by
ABC Supply
and
Beacon Roofing
at four apiece and
Travis Roofing Supply
with one.
Meanwhile, a total of 62 facilities have changed hands so far in 2019. By this time last year, there were 53. Here are the most notable deals to have taken place since mid-March:
US LBM
made two acquisitions: The six-unit, Mississippi-based
Bailey Lumber & Supply
and
BM Windows
of Las Vegas.
Travis Roofing Supply
plans to open a new branch in Nashville, Tenn., by late April.
Busy Beaver
opened a new branch in Elkins, W.Va.
US LBM's Universal Supply
unit opened a new store in Edgewood, Md.
SRS Distribution
opened greenfield locations in Sudbury, MA; Fargo, ND; Spokane, WA; and Belton, TX. The announcement came a few weeks after SRS said it opened greenfield stores in Austin, TX; Medina, MN; and Delray Beach, FL.
Beacon Roofing Supply
opened four new locations between Jan. 1 and March 31 In Sparks, NV; Fresno, CA; Panama City, FL; and Plano, TX.
Fingerle Lumber
of Ann Arbor, MI, finally closed. Taking advantage of that action,
Mans Lumber
opened a showroom in Ann Arbor and hired several of Fingerle's employees.
Sunroc
bought
Sierra Truss
of Willard, UT.
Gordon Lumber
closed facilities in Bowling Green and Bellevue, OH, consolidating those operations with nearby yards.
ABC Supply
opened a new yard in Junction City, KS.
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BlueTarp CEO: Too Often, Unquestioned Details Hide Potential Problems With an Acquisition
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The old joke is that the Federal Reserve's job is to take away the punchbowl just when everyone around it is starting to have fun. Due diligence officers are like that. And if you're involved in buying a construction supply company, you'd be well-served to examine both the punch and the bowl--in other words, both the company's financial numbers and the system the produces them.
For instance, BlueTarp CEO Scott Simpson suggests potential acquirers dig into numbers like AR days outstanding to check customers' current credit standing, examining key customers at minimum and the entire account base if possible. "Are there lots of sales concentrated in a few customers?" he asked. "The larger sales that you're about to buy--are they healthy customers." The answer, he says, should be: "I need to find if they are good. ... I want to know the quality of the best customers first."
At the same time, Simpson says due diligence also should extends to the company's policies. For instance, a company might boast that it doesn't feel the need to charge off past-due accounts, but it turns out it has some debts that are five years old.
"How well-run a company is matters a ton," says Simpson, whose company provides credit management services to more than 2,000 building material dealers nationwide., "We see a lot of mistakes, particularly with small-business owners, on management control processes, or what tools are there to run the business that work when the owner isn’t there.”
Simpson even pays attention to how clean the yard is, It's just like buying a used car, he says. "There's a difference when you look under the hood and see a pristine engine, and the car has the service records," he says. "How you do one thing is how you do everything. And owners and acquirers are looking to see the company is well-run.”
Details matter, Simpson says. After all, “You only get one time to do this right.”
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NAHB CEO: Look to Vets, At-Risk Youths,
and Ex-Cons as Sources for New Workers
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The CEO of the National Association of Home Builders (NAHB) suggests you consider three relatively underused sources of workers to help ease the construction labor crisis.
In comments delivered April 2 to members of the National Lumber and Building Material Dealers Association (NLBMDA) and the Window & Door Manufacturers Association (WDMA), Jerry Howard said all members of the NAHB are feeling strains from trying to find workers. Roughly 300,000 available construction jobs are going unfilled today, he said.
The first group Howard cited as a potential source was veterans, including vets who currently are homeless. Second, NAHB is urging guidance counselors to suggest construction jobs to at-risk youths. The problem is that many of these counselors are rated according to what percentage of their students go to college, Howard said, even though work in construction and construction supply might be a better fit.
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The third group Howard cited was people who had served prison terms for non-violent crimes. The NAHB leader noted that, one day earlier, he had attended a White House event in recognition of the passage of the FIRST STEP Act, which promotes the integration of ex-prisoners back into society.
One person featured at the event was Troy Powell (shown here, with President Trump), who served 15 years in prison for a drug offense but now is working at lumberyard in Boone, N.C.
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Brookings' Eyebrow-Raising Forecast on AI Points to Big Changes at Factories, Dealers
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Think hard about what it takes to build a window or deliver a unit of lumber. Break the job down into every possible task: from pulling, assembling, and measuring to packing, driving, and delivering. Think as well about office chores: order-taking, billing, check-cutting, time-keeping, and more. Which of those tasks are performed more or less the same way every time? Which need to be done
exactly
the same way to assure product quality? You've just named the jobs that could be better done by a machine.
The Brookings Institution recently collected a lot of information on this topic and reached what, for some, will be a frightening conclusion: roughly 36 million jobs (one quarter of the entire U.S. labor force) will face "high exposure to automation" over the coming decades. Brookings defines high exposure as being in a job in which at least 70% of what you do can be automated--and you no longer will be needed.
This doesn't mean massive layoffs are in our future; Brookings also points out that the technological revolution of recent decades created as many new jobs as it made redundant. But its
report
does imply that companies writing long-term plans today should begin to imagine their businesses potentially looking much different than they do today.
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For instance, consider the December 2018
McKinsey report
that predicted the development of driverless trucks will reach the point by 2025 that the only reason you'll need to have a "driver" in the vehicle is to handle loading and unloading of goods. Hours of service rules would become obsolete as the truck's occupant sleeps during the drive to the jobsite or warehouse, waking up only when the truck arrives. With trucks doing most of the work, requirements to get commercial driver's licenses could drop dramatically. Or the CDL might become obsolete.
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We Can Answer Your Most Pressing M&A Questions
* How do the most active buyers in today’s market value my company?
* What parts of the business should I change to improve its valuation?
* When is the right time to sell?
These are questions that are commonly asked by the owners of building products manufacturers and distributors. Our work in selling and raising capital for companies puts us in a unique position to help answer these important questions. Regardless of when you might decide to approach the market, please contact me to have a confidential discussion about your company and ways to maximize its value for the owners.
Michael Collins
Work 312-854-8036
Cell 312-282-5462
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