Pockets of Potential: Building Products Opportunities Remain Amid Economic Uncertainty

Despite current economic uncertainty, the building products industry continues to offer investors pockets of opportunity where core fundamentals remain strong. In addition, increased selectivity among some buyers is creating potential avenues for others. 

Here, senior bankers from the Harris Williams Building Products and Materials Group discuss the enduring appeal of the sector, which areas present the best M&A opportunities, and what investors should know about getting involved. 

Why should building products be on investors’ radar in today’s environment?

Webb: Strong underlying fundamentals will fuel the broader sector over the long-term, with key trends positioning differentiated platforms for sustained growth. There’s low home inventory relative to demand as a result of underinvestment in home starts over the last several years. Millennials are now pursuing home ownership after hitting pause during the last recession. And while there’s economic uncertainty, consumers continue to spend more on home repair and renovations, setting up excellent long-term opportunities for investors.  

Denoncourt: The current economic situation is also creating unique opportunities for investors ready to take advantage. Understandably, some investors have signaled intent to be more selective and risk averse in the near-term, creating a less crowded building products market for those who can find unique angles. 

Webb: There are pockets within the sector to invest in, with specific segments we continue to be excited about. Investors willing to investigate these areas could be rewarded with less competition for the highest quality assets. 

Which areas have the most growth potential and M&A opportunities?

Webb: One target area for investors is the high-end consumer market, which is relatively resilient to the current economic climate. According to a recent analyst call with the CEO of American Express, well-off consumers are keeping up with their payments, and he expects charge-offs and delinquencies to remain below pre-pandemic levels. These affluent and price insensitive consumers are less impacted by price hikes and inflation. Along the same lines, recent surveys show more affluent consumers are feeling no financial hardship amid rising prices, and very few are feeling severe hardship. According to recent Harris Williams research, around 65% of affluent consumers would maintain or increase spending on their homes even in the event of an economic slowdown.i Due to these tendencies, considerable incremental customization and upsell opportunities exist within the market. Platforms who focus on this high-end demographic have a great opportunity for resilient financial performance and to increase their overall profitability throughout economic cycles.

Hogan: Companies with repair and remodel service capabilities also have an attractive path to more market share. We’ve seen significant increases in home price appreciation and corresponding levels of available home equity. Nationally, home prices jumped 20% from April 2021 to April 2022, and there weren’t any states that posted a decline. Prices have risen so much that consumers may be more likely to invest in their current home than buy a new one, and these trends are forecasted to continue into 2023. In fact, our latest consumer survey shows that more than 80% of consumers who already performed a renovation costing $5,000 or more plan on performing more renovations over the next one to two years. These consumers prioritize bath, kitchen, and outdoor living spaces.ii This will continue to support repair and remodeling activity and create sustainable growth opportunities for investors. 

Webb: Additionally, platforms that serve growing cities are poised for success. Many people are currently moving from northern locales to warmer areas with more attractive economic environments—according to one often-cited article around 1,000 people move to Florida every day, for example. This surge in migration and population is positively impacting the building products sector. By focusing on these highly active geographic markets, companies can put themselves in a great position to expand and create more value. 

How should investors approach this opportunity?

Denoncourt: Although there are many unique areas within building products, it’s still important to approach the sector cautiously. Rising borrowing, materials, and labor costs, as well as growing concerns about a broader economic recession, may contribute to slowed growth, and M&A lenders are exhibiting some caution.

Webb: These economic shifts make it even more essential for investors to focus on opportunities that feature core fundamentals of a strong business model. Traits of highly desirable assets to look for include a strong management team, proven resilience through past economic cycles, defensible business model, differentiated product offerings or value-added services, and a history of organic and inorganic growth. 

Hogan: Lastly, from a size perspective, the middle market exemplifies an attractive segment for investor focus. While many middle-market businesses are of a large enough scale and sophistication to serve as a platform investment, there is still ample opportunity to professionalize and institutionalize them as well as to leverage M&A for meaningful, accretive growth.

Conclusion

Despite financial headlines, there are a range of attractive investment opportunities within building products and materials. Well-positioned platforms will gain share and generate growth in this dynamic environment by taking advantage of decreased competition for these stronger and more resilient prospects. 

In addition to building products, the Harris Williams Building Products & Materials Group has expertise in a wide range of subsectors.

Please contact our senior bankers to learn more. 


iHarris Williams 2022 Consumer Survey
iiibid

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