INDUSTRY UPDATE Building Materials – Q409 Construction Estimators

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INDUSTRY UPDATE Building Materials – Q409 Construction Estimators Powered By Docstoc
					                                                                                                                   11/30/09

                                             Kathryn I. Thompson / 615-891-6206 / kthompson@thompsonresearchgroup.com
                                                   David C. Wells, Jr. / 615-891-6207 / dwells@thompsonresearchgroup.com


INDUSTRY UPDATE
Building Materials – Q4’09 Construction Estimators Survey

RELEVANT COMPANIES:                                      TRG SNAPSHOT:
                                                         We recently surveyed 30+ project estimators at major construction
Ticker       Price    Rating     Market      Short       firms across the U.S. Within a construction firm, the project
                                  Cap       Interest     estimator is responsible for bid preparation. As such, we believe
                                              (% of      estimators are well positioned to comment on project margins, raw
                                             float)      materials pricing, and overall bidding trends.
ASTE         $24.77    Buy      $563.2M      15.9%
BECN         $15.45    Hold     $694.4M      12.7%       KEY POINTS:
 CAT         $57.45    Hold     $36.51B       5.6%
 EXP         $27.08    Hold      $1.19B      11.4%              The following were key themes from our construction
 GVA         $30.26    Buy       $1.14B      11.6%               estimator survey:
MLM          $84.03    Hold      $3.79B      18.9%                   o 80% of those surveyed reported their end market
MTW           $9.90    Buy       $1.29B       9.2%                       mix of revenues has shifted toward public
STRL         $16.78    Buy      $230.6M       8.5%
                                                                         construction over the past 12-18 months.
 TEX         $18.98    Hold      $1.88B      10.5%
                                                                     o Bid activity mixed.
 TXI         $33.71    Hold     $933.9M      26.3%
USG          $13.83    Hold      $1.37B      20.0%                   o Stimulus work gaining importance.
VMC          $48.69    Buy       $5.39B      16.0%                   o Margins remain under pressure.
                                                                     o Raw materials pricing mostly modestly improved.
                                                                     o Equipment purchases unlikely in the next 6-12 mo.
    Please see Appendix 1 for a complete
                comp table.                                     TRG opinion. Our Q4’09 Construction Estimator survey
                                                                 suggests competitive bidding activity for construction
                                                                 companies remains high. Reflective of our November 2009
FOR DISCLOSURES, PLEASE REFER TO                                 state DOT survey (published 11/24/09), construction
   THE IMPORTANT DISCLOSURES                                     estimators report stimulus dollars have started to flow. That
SECTION ON PAGE 7 OF THIS REPORT.                                said, the 2010 outlook for construction companies is
                                                                 somewhat mixed. While several noted stimulus and public
                                                                 construction work will provide some much-needed support, a
                                                                 handful are uncertain about 2010. Larger, more financially
                                                                 sound E&C companies such as GVA and STRL are better
         TRG will be in Washington, D.C.                         positioned in 2010. GVA is trading at 3x cash and STRL at
        this week tracking the progress of a                     2x cash. GVA is trading at 4.6x 2010 EV/EBITDA and 3.5x
        potential jobs bill and a transportation                 recovery EV/EBITDA (2011) and STRL is an even more
         bill extension.                                         modest at 3.7x 2010 EV/EBITDA and 3.2x 2011 EV/EBITDA.
                                                                 It is our sense that we are at or near the bottom for E&C
         .                                                       companies, and as the weaker players struggle to survive
                                                                 during the winter seasonal slowdown, the more financially
                                                                 sound players will emerge as the real winners by late spring
                                                                 and summer. We remain focused on VMC, GVA, STRL, and
                                                                 ASTE, as we believe these have more upside potential
                                                                 due to their end market and geographic exposure.
 
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Figure 1. Geographic and End-Market                                    KEY DETAILS:
Dispersion
                                                                       In order to get a better sense of the current public and non-
Geographic area                                                        residential construction environment, we recently surveyed
served?                                                                30+ project estimators at major construction firms across
Midwest                                   10.8%                        the U.S. Within a construction firm, the project estimator is
                                                                       responsible for bid preparation. As such, we believe estimators
Northeast                                 16.2%
                                                                       are well positioned to comment on project margins, raw materials
South                                     10.8%                        pricing, and overall bidding trends. Figure 1 outlines the
West                                      29.7%                        weighting of end market responses, and Figure 2 highlights key
Other                                     32.4%                        state exposure for our building materials coverage.
Sources: Industry Sources; TRG Research
                                                                       Not surprisingly, 80% of those surveyed reported that their
Figure 2. Revenues by End Market                                       end market mix of revenues has changed over the past 12-18
                 VMC     MLM        TXI   EXP       GVA   STRL         months. Relevant quotes regarding the change in mix shift
California       20%                20%   < 5%      38%                includes the following:
Florida          20%     6%
                                          30%-            at least
Texas           7%-8%    19%        80%
North Carolina           19%
                                          35%              63%
                                                                                  Shift from mostly privately funded to publically or
Georgia         9%-10%    9%                                                       institutionally funded work. (National)
Virginia
Iowa
               10%-11%    2%
                          7%
                                                                                  No private work available. (Northeast)
Louisiana                 5%                                                      We have been heavy in Public for some time and were
South Carolina            5%
Note: FL, CA, TX, AZ are CX’s 4 largest U.S. markets
                                                                                   not impacted heavily by the Residential & Non-
Sources: Company Reports; TRG Research                                             Residential collapse. (West)
                                                                                  Work is much higher percentage public. Residential now
Figure 3. Construction Bidding Activity                                            nearly nothing. (West)
How is your bidding                                                               The private market is very slow, the public works has
activity this year vs.
last?                          Up            Flat              Down
                                                                                   been steadier but more 'abrupt'. (West)
                           41.9%            22.6%              35.5%              Stimulus package is working. (Northeast, Midwest,
Sources: Industry Sources; TRG Research                                            South)
                                                                                  More public, less private, except medical still strong.
                                                                                   (National)
                                                                                  Bidding mostly public projects these days. (South)
                                                                                  Minimal Resort - more public money projects.
                                                                                   (Northeast)

                                                                       Bid activity mixed
                                                                       Our survey results were mixed regarding bidding activity, with
                                                                       41.9% of respondents indicating “up” YOY bidding levels and
                                                                       conversely 35.5% reporting “down” levels of bidding activity (see
                                                                       Figure 3). Bidding activity has increased due to a lack of
                                                                       commercial and residential projections, with many contractors
                                                                       bidding on any project just to stay in business. We also expect
                                                                       the increase is driven by competition for stimulus infrastructure
                                                                       work.

                                                                       Stimulus work gaining importance
                                                                       51.6% of survey respondents have bid on stimulus projects.
                                                                       Stimulus work as a percentage of total business has ranged
                                                                       anywhere from 5% up to 80%. Of those firms surveyed that have
                                                                       bid on stimulus work, approximately 50% reported stimulus
                                                                       projects account for 10%+ of total business.


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Figure 4. Project Margins                             Margins remain under pressure
Are you bidding
projects above, below,
                                                      Margins under pressure. 73.3% of survey respondents
or in-line with normal                                indicated that projects are being bid with margins below normal
margins?                 Above     Below    In-line   (see Figure 4). The drivers for lowered margins were primarily
                         0.0%       73.3%   26.7%     increased competition for bidding, as well as the need for
Sources: Industry Sources; TRG Research               additional work to keep staff employed. Relevant quotes
                                                      regarding bidding activity and reasons for margin pressures
                                                      include the following:

                                                                 Primary drive is to win the project. Make up is in “change
                                                                  orders.” (Northeast)
                                                                 Much more competition than normal. (National)
                                                                 I am bidding very low just to get work and will continue to
                                                                  do so to keep working. It will be a year or more before
                                                                  margins improve. (South)
                                                                 Competition is bidding projects well below cost to
                                                                  survive. (Midwest)
                                                                 Competition is keeping prices low. We are counting on
                                                                  our field operations to build the projects for costs below
                                                                  their budget. (West)
                                                                 Competition: We have set a company goal to increase
                                                                  as-build gross profit margins and gear our Operations
                                                                  around making that happen through preplanning to
                                                                  increase productivity and good Project Management.
                                                                  (West)
                                                                 Even strong competitors are bidding at very small
                                                                  margins just for cash flow. (South)
                                                                 Competitors are bidding to stay in business (minimal
                                                                  equipment or minimal overhead). We are trying to make
                                                                  it up in efficiencies and productions. (West)
                                                                 Lowering margins to stay competitive. Making up margin
                                                                  by cutting overhead expenses. (West)
                                                                 Competition is the driver. If we don't cut prices, we will
                                                                  not be anywhere near competitive. Making up the margin
                                                                  by buying less equipment, cutting salaries, cutting
                                                                  employee benefits, less profit. (West)

                                                      74.2% of construction estimators surveyed do not expect
                                                      margins to improve in 2010. Relevant quotes include the
                                                      following:

                                                                 There is still too much competition for too little work in
                                                                  our market place. The influx of Residential & Non-
                                                                  Residential contractors into Public should keep prices
                                                                  down. (West)
                                                                 Apparently there is getting to be more requests for what I
                                                                  do. (National)
                                                                 I am bidding very low just to get work and will continue to
                                                                  do so to keep working. It will be a year or more before
                                                                  margins improve. (South)



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Figure 5. Raw Materials Pricing                     Raw materials mostly modestly improved
How are raw materials
                                                    Figure 5 demonstrates that aggregate and concrete pricing is
prices trending?         Up         Flat    Down
Aggregate               24.0%       60.0%   16.0%
                                                    holding flattish to up for construction firms. We found it interesting
Concrete                30.4%       43.5%   26.1%
                                                    that 84.0% of respondents reported flat to up aggregate pricing
Steel                   36.4%       27.3%   36.4%   trends vs. 81.5% in our August survey. Interestingly, 73.9% of
Sources: Industry Sources; TRG Research             respondents reported flat to up concrete pricing. Steel pricing
                                                    trends were mixed. Only 16.1% of those surveyed plan on
                                                    purchasing equipment over the next 6-12 months. TRG’s most
                                                    recent state DOT survey published on 11/24/09 confirms that
                                                    states are seeing record obligations as 2009 comes to a close,
                                                    which will lead to record allocations (i.e., dollars spent) in 2010.
                                                    Overall, we expect to see some volume improvement in 2010
                                                    and pricing should follow.

                                                    Direct quotes regarding 2010 outlook include the following:
                                                         Public sector work will increase. Institutional work will
                                                            begin to pick up in the later part of 2010 and private work
                                                            will lag behind as financing private work is still an issue.
                                                            (National)
                                                         It seems that our Public Agencies will have funding for
                                                            2010 projects and we are carrying a good backlog into
                                                            the year. We will maintain our volume with lower
                                                            margins. 2011 seems extremely uncertain. (West)
                                                         Depending on an increase in employment, I look for a
                                                            slow steady improvement. Just don't panic. (National)
                                                         Going to be a tough year if we don't pick up some more
                                                            work. The public sector and health care seem to be the
                                                            only active construction markets. If the private sector
                                                            starts to build again, that would turn things around.
                                                            (South)
                                                         Better than 2009, flat compared to 2008. (Northeast)
                                                         We are looking for 2010 to be a down year unless the
                                                            private market improves. (West)
                                                         We are expecting 2010 to be worse. (Midwest)
                                                         2010 will be a tough year. I expect to see some weaker
                                                            subcontractors and general contractors to go out of
                                                            business. (South)
                                                         Hoping for more stimulus projects. We are hoping that
                                                            the huge inflow of projects this fall has not exhaused the
                                                            projects that were ready for bid. (West)
                                                         Economy should stabilize and work should pick up.
                                                            (West)
                                                         Continue to be slow throughout 2010. (West)

                                                    TRG Opinion
                                                    Our Q4’09 Construction Estimator survey suggests competitive
                                                    bidding activity for construction companies remains high.
                                                    Reflective of our November 2009 state DOT survey (published
                                                    11/24/09), construction estimators report stimulus dollars have
                                                    started to flow, and record obligations in 2009 translate to record
                                                    allocations (i.e., money spent) in 2010. That said, the 2010
                                                    outlook for construction companies is somewhat mixed. While
                                                    several noted stimulus and public construction work will provide
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some much-needed support, a handful were uncertain about
2010. It is our sense that larger, more financially sound
engineering & constructions (E&C) companies, such as Granite
Construction (GVA – Buy) and Sterling Construction (STRL –
Buy) are better positioned in 2010. GVA is trading at 3x cash and
STRL at 2x cash. GVA is trading at 4.6x 2010 EV/EBITDA and
3.5x recovery EV/EBITDA (2011) and STRL is an even more
modest at 3.7x 2010 EV/EBITDA and 3.2x 2011 EV/EBITDA.
Overall, it is our sense that we are at or near the bottom for E&C
companies, and as weaker players struggle to survive during the
winter seasonal slowdown, the more financially sound players will
emerge as the real winners by late spring and summer.

We were also encouraged by feedback regarding materials
pricing trends. A great deal of focus has been placed on
aggregate pricing, and our Q4’09 construction estimator survey
suggests the worse may be behind us. We also noted relatively
better concrete pricing trends vs. our expectations. That said,
TRG remains focused on volumes, as volume trends lead pricing
trends. Our recent DOT survey and ARRA funds flow research
confirm that public construction volumes will be up in 2010.

Not to beat a dead horse, but we are compelled again to outline
our view perspective on D.C. and potential implications for TRG’s
industrials coverage. We believe the House will take up a jobs
creation bill in early December. We believe the Senate will pass
a six-month extension to highway spending in December that will
restore funding to pre-rescission levels and begin debating a
House passed job creation bill in early 2010. We understand
infrastructure spending will be included in any bill passed on job
creation and funding will be in addition to the six-month spending
extension. If we are correct, all stocks in our coverage universe
will rise. As we have published in several recent reports, our top
picks in the group are VMC, GVA, STRL, and ASTE. We
expect MLM, TXI, and EXP will also rise. However, we
believe VMC, GVA, STRL, and ASTE have more upside
potential due to their end market and geographic exposure.




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APPENDIX 1 – BUILDING MATERIALS COMP TABLE:




APPENDIX 2 – CONSTRUCTION EQUIPMENT COMP TABLE:




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IMPORTANT DISCLOSURES:

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The appropriate rating is based off the estimated total return of the stock over a forward 12 month period, including both
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Buy rated stocks included a published 12-month price target. The price target represents the analyst’s best estimate of the
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Stocks rated Buy are required to have a published 12-month price target, while it is not required on stocks rated Hold and
Sell.




   Date              Action             Price
   10/14/09          Buy                $26.35




                                                             8
Date       Action   Price        Date      Action   Price
9/01/09    Buy      $32.10       9/01/09   Buy      $16.10




Date       Action   Price
10/14/09   Buy      $10.02




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                                                                Date             Action           Price
                                                                9/01/09          Buy              $50.04




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