Mercer Capitals Value Focus: Construction Industry | Q2 2015

BUSINESS VALUATION & FINANCIAL ADVISORY SERVICES

Construction Overview Construction & National GDP 1Construction & National Unemployment 2Value of Construction Put-in-Place 3

Sector Focus: Building Materials 4

Government Funding for Highways & Government Consumption and Investment 5Trade-Weighted Index 6Yield on 10-Year Treasury 7Industrial Production Index 8Value of Utilities Construction 9

Sector Round-up Residential Construction 10Roads, Bridges, and Highways 12Nonresidential 13

Mergers and Acquisitions 14

Bellwether Stocks & Industry Participants 16

About Mercer Capital 19

www.mercercapital.com

VALUE FOCUS

Second Quarter 2015

Construction & Building Materials

SEGMENT FOCUS Building Materials

EXECUTIVE INDUSTRY TRENDS

• M&A activity increased due to proposed LafargeHolcim mega-

merger

• Put-in-place measures show strong quarterly and annual numbers

for residential and nonresidential

• The NAHB Indices show strong consumer confidence on the year,

particularly this past quarter

• The strengthening of the Dollar slowed as the 10-year yield spiked

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Mercer Capital’s Value Focus: Construction & Building Materials Second Quarter 2015

GDP rose 3.7% over the past 12 months, falling at the higher end of an ideal range of 2% to 4% annually. Over the past

10 years, construction has averaged 4.1% of national GDP, and it accounted for 3.9% of GDP this past quarter. These

are signs the economy, including the construction industry, are healthy and returning to normal levels. Construction

lagged behind the rest of the economy, particularly in the years following the decline of 2009, but has since steadily

recovered, marked by a 9.8% year-over-year increase in Construction GDP. All of these figures are expected to continue

to improve going forward.

$0

$100

$200

$300

$400

$500

$600

$700

$800

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

GD

P ($Billions)

Ann

ualiz

ed R

eal G

row

th R

ate

Quarterly Growth Average Quarterly Growth GDP (Current Dollars)Source: Bureau of Economic Analysis

-6%-4%-2%0%2%4%6%

National Construction

Construction OverviewConstruction & National GDP

Construction Gross Domestic Product

% Change in GDP

Source: Tradingeconomics.com | U.S. Bureau of Economic Analysis

Construction GDP

Period % Change

Q-o-Q 1.8%

Y-o-Y 9.8%

National GDP

Period % Change

Q-o-Q 1.5%

Y-o-Y 3.7%





According to the Federal Reserve, a healthy economy typically has an unemployment rate between 4.5% and 6.0%. The

current level of 5.3% is right in the middle and has decreased from 6.1% a year ago in a steady fashion.

Construction is a cyclical and seasonal industry, so its unemployment rate is more volatile. The major contributing

factor to the seasonal nature of the construction industry is the weather. Production of materials and projects in

general decrease during the cold, winter months. The construction unemployment rate is currently 6.3%, down from

8.2% a year ago. This represents a generally positive trend for the industry. This number will likely continue to

decrease coming out of the cold months and into the strongest parts of the calendar year, especially considering the

unemployment rate was well above 10% in the middle of last quarter. Lower unemployment rates suggest an increase

of activity within the industry.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

National Construction

Source: U.S. Bureau of Labor Statistics

Note: In the above graph, the national unemployment rate is seasonally adjusted, but the construction unemployment rate is not in order to show seasonality and recent trends.

Construction OverviewConstruction & National Unemployment

Unemployment Rate





The value of construction put-in-place is the total cost of construction on job sites during a particular period. The U.S.

Census Bureau tracks this data and reports the total monthly. These costs include, but are not limited to, the building

materials, labor, profit, engineering, interest, and taxes.

Year-over-year put-in-place construction has surged, up 19.5% for residential and 8.6% for nonresidential. This past

quarter shows a similar pattern with residential construction increasing by 4.8%, and nonresidential construction

increasing by 7.4%. These strong numbers are likely due to warmer weather. While growth figures will likely decline in

magnitude, they are expected to remain strong going forward. Higher levels of put-in-place construction suggest an

increase of activity within the industry.

Construction OverviewValue of Construction Put-in-Place

$0

$100

$200

$300

$400

$500

$600

$700

$800

$Billions

Residential NonresidentialSource: U.S. Census Bureau

Value of Construction Put-in-Place

Residential

Period % Change

Q-o-Q 4.8%

Y-o-Y 19.5%

Nonresidential

Period % Change

Q-o-Q 7.4%

Y-o-Y 8.6%





This quarter was defined by historic levels of rainfall that hindered production and depressed volumes. Given the

nature of the industry, it is important to remember building materials are sold to contractors with backlogs, performing

construction projects that must eventually be completed, no matter how much rain falls. While quarterly gains were

lower than expectations, inclement weather simply delays profits as roads still need to be repaired and homes still need

to be built. Companies took advantage of down time to complete maintenance repairs on their fixed assets, which will

increase production capacity to match pent-up demand.

Congress has been working on a new bill to improve national infrastructure. State and local governments are typically

in charge of their construction projects, but they rely on federal funding to complete many projects. This long-term

bill would give not just funding, but security. Many states have kept big projects on the back-burner because they do

not have a guarantee that their funding will last for the duration of the project. The increased likelihood of such a bill

is a boon to the building materials industry, but state and local governments are also doing their part with increased

investment in respective transportation departments.

With demand postponed due to rain, volumes are expected to increase significantly. Volume increasing is typically a

leading indicator for increasing price levels, so building materials companies can expect a boost in their margins. Material

prices are frequently locked in for the duration of a project or on a yearly basis. With an expectation of price increases on

the horizon, quoted prices will likely be higher than current levels, but lower than future increases, benefitting both sides.

Expected increases in both residential and nonresidential construction will further help the building materials industry.

Increased spending on infrastructure and industrial projects is a boost to nonresidential construction while population

and employment growth help fuel residential construction. Diesel and gas prices for the quarter were lower than prior

quarters and significantly lower than prices in the prior year. With such heavy products and freight costs being a large

component of price, companies have accumulated significant savings on delivery.

Lafarge and Holcim, two of the largest players in the industry, both domestically and globally, have announced divestitures

of certain assets this quarter to avoid anti-trust regulation issues ahead of their looming merger. Eagle Materials,

Continental Concrete Company, and ESSROC Cement Corp will all acquired some of these assets when the merger

closes. US Concrete made a few acquisitions totaling 12 plants and 171 mixer trucks across Virginia, New York City, and

northern New Jersey. Summit Materials continued their growth strategy with another acquisition costing $15.9 million.

Sector FocusBuilding Materials





Building materials are a crucial input to construction projects. Without funding, however, construction projects cannot

be completed. Much of this funding comes from public resources, so the industry must always be concerned with the

level of government spending on construction activity. Government consumption expenditures and gross investments

reached high levels during the recession to boost the economy and have declined significantly in the years following.

Spending likely will not reach that level any time soon, though it has increased slowly in the past couple of years and

is expected to continue in this direction. Government funding for highways is expected to increase significantly, as

demonstrated in the below graph, despite a small decrease from the previous year. This is in large part due to the

expected long-term congressional funding bill for highway repairs and construction.

Building MaterialsGovernment Funding for Highways & Government Consumption and Investment

Government Funding for Highways

Government Consumption and Investment

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$50

$100

$150

$200

$250

$300

$Billions

Source: IBIS World | Bureau of Economic Analysis

$2,650$2,700$2,750$2,800$2,850$2,900$2,950$3,000$3,050$3,100$3,150

$Billions

Source: St. Louis Fed | U.S. Bureau of Economic Analysis

Government Funding

for Highways

Period % Change

Y-o-Y -2.1%

Government Consumption

and Investment

Period % Change

Q-o-Q 0.6%

Y-o-Y 0.7%





The Trade-Weighted Index measures the relative strength of the U.S. dollar in comparison to foreign currencies, putting

an emphasized weight on the most common trade partners and largest economies. When the dollar is strong, imports

become cheaper and exports become more expensive. The dollar is near its strongest level in the last 10 years, which

increases the cost for other countries to purchase U.S. building materials and decreases sales volume. It has declined

slightly in the past quarter, signaling that the rapid growth of the past year may finally be slowing.

80

90

100

110

120

Source: St. Louis Fed | Board of Governors of the Federal Reserve (US)

Building MaterialsTrade-Weighted Index

Trade-Weighted Index

Trade-Weighted Index

Period % Change

Q-o-Q -1.0%

Y-o-Y 12.4%





The yield on 10-Year Treasury Bonds acts as a proxy for how expensive it is to finance construction projects. Growth

in the building materials industry could be adversely affected by the recent quarterly spike in interest rates. It should

be noted, however, that flight to safety during gloomy macroeconomic times can depress yields. An increase in

yields raises the cost of investment, but it can also signify increasing optimism, which leads to more spending in the

construction industry.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%


Building MaterialsYield on 10-Year Treasury

Yield on 10-Year Treasury

Yield on 10-Year Treasury

Period % Change

Q-o-Q 32 BPS

Y-o-Y -24 BPS





The Industrial Production Index is an indicator of economic activity that measures real production output of the

manufacturing, mining, and utilities industries. It acts a barometer for the level of demand for industrial products and

manufacturing activity. Building materials such as sand and gravel are important inputs of industrial production. IPI has

been steadily increasing since 2009, but it has slowed in the past year, particularly in the past quarter. This could show a

leveling off in demand for building materials, which would decrease industry revenue after years of slow, steady growth.

80

85

90

95

100

105

110


Building MaterialsIndustrial Production Index

Industrial Production Index

Industrial Production Index

Period % Change

Q-o-Q -0.6%

Y-o-Y -0.2%





Cement and ready-mix concrete are used in most construction projects involving the utilities subsector such as

transportation, energy, gas, water, and sewage. There will always be a need for such infrastructure, so building materials

companies can rely on this revenue stream even though the growth rate of new projects fluctuates. The value of utilities

construction is expected to increase similar to non-residential construction levels as a whole, which should also increase

demand for the industry. While it is significantly down for the past year, the value of utilities construction has increased

in the past quarter. If this trend continues, building materials companies will experience increased demand.

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180$Billions

Source: US Census Bureau

Building MaterialsValue of Utilities Construction

Value of Utilities Construction

Value of Utilities Construction

Period % Change

Q-o-Q 6.4%

Y-o-Y -12.8%





The National Association of Home Builders uses surveys to produce two indices on the confidence level within the

homebuilding industry. For both surveys, respondents are asked to rate market conditions, with 50 being the index

average. Both indices showed clear declines due to the housing crisis, but they have steadily increased and have been

above 50 for the past year. HMI has spiked in the past quarter and undergone significant increases in the past year.

RMI has grown much slower, but this growth is certainly a positive indicator. While there will likely be fluctuations going

forward, it is a good sign as long as these indices are above average.

0

10

20

30

40

50

60

70

80

90

100

HMI RMINote: RMI is measured quarterly and approximated for a monthly basis using a straight-line approach. Source: National Association of Home Builders

Sector Round-upResidential Construction

NAHB Housing Market and Remodeling Market Indices

NAHB HMI

Period % Change

Q-o-Q 15.4%

Y-o-Y 22.4%

NAHB RMI

Period % Change

Q-o-Q 4.0%

Y-o-Y 4.9%





Building permits and housing starts are two important indicators for the home building industry. Both reflect demand,

consumer confidence, and the feasibility of financing such construction projects. Building permits can be issued and then

shelved by builders; therefore, housing starts are a better focused measure of current activity within the industry. Housing

permits and housing starts have felt the effect of the housing bubble with a steep drop of nearly 75% in three years from

Q1 2006 to Q1 2009. Both of these have recovered somewhat as the economy has gotten back on track, but they are

unlikely to reach prerecession highs, which were artificially high due to the housing bubble. As seen in the charts below,

all levels of permits and starts have increased notably over the past year driven by a particularly strong quarter.

Sector Round-upResidential Construction(continued)

Seasonally Adjusted Annualized Rates of New Housing Starts and Building Permits

Millions of Units

Private Housing Starts

Period % Change

Q-o-Q 23.1%

Y-o-Y 26.6%

Single Family Starts

Period % Change

Q-o-Q 10.0%

Y-o-Y 14.7%

Private Building Permits

Period % Change

Q-o-Q 29.4%

Y-o-Y 30.0%

Single Family Building Permits

Period % Change

Q-o-Q 7.0%

Y-o-Y 6.0%

0.20.30.40.50.60.70.80.91.01.11.21.31.41.51.61.71.81.92.02.12.22.32.4

Private Housing Starts Single Family Starts

Private Building Permits Single Family Building Permits

Source: U.S. Census BureauNote: Permits at a given date are generally a leading indicator of future starts. Beginning with January 2004, building permit data reflects the change to the 20,000 place series.

Private Housing

Single Family Housing





The yield on 10-Year Treasury Bonds, as shownon page 7, can indirectly affect the road contracting industry. Higher

interest rates make construction projects more expensive to undertake. When yields on the 10-Year Treasury are low

and stable, the construction industry experiences increased investment and volume. When interest rates are high,

it is more expensive for the public sector to finance industry projects such as road building. The 10-Year yield has

significantly increased in the past quarter, despite an overall decrease in year-over-year yields. If the quarterly increase

continues, the industry will face rising investment costs. However, if the yearly trend continues, demand will likely

increase in the industry.

Road contractors submit bids to local and state governments, and construction jobs are awarded to the lowest bidder.

Higher input costs, like cement, decrease both the volume of projects the government is willing to start and the profit

margins for contractors. The US Geological Survey determines the trend of cement prices, and its increase represents

a negative sign for the industry.

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r Ton

Sector Round-upRoads, Bridges, and Highways

Price of Cement

Price of Cement

Period % Change

Y-o-Y 5.0%

Source: IBIS World | U.S. Geological Survey





Corporate profit is essential for companies not only to survive, but to grow and expand. When corporate profit increases,

companies are more willing and able to open new branches and divisions. These additions lead to more commercial

construction. According to the chart below, corporate profit has increased notably in the past year, driven by a strong

quarter. If this growth continues, companies will be more likely to invest in nonresidential construction and, in turn,

increase the demand for building materials.

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$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

$Billions

Source: St. Louis Federal Reserve

Sector Round-upNonresidential

Corporate Profit

Corporate Profit

Period % Change

Q-o-Q 6.3%

Y-o-Y 8.5%





Announce

Date

Industry

Subsector Target/Issuer Buyers/Investors Seller Description

June 18Building

MaterialsLewis and Lewis Inc. Summit Materials, Inc.

Manufactures and supplies aggregate materials in

WY.

June 17Building

Materials

Anchor Block Company and

Anchor Wall Systems, Inc.

Oldcastle Architectural,

Inc.

Designs, manufactures, and sells concrete land-

scape and masonry products.

June 14 Home Building Ryland Group Inc. CalAtlantic Group, Inc.

SSGA Funds Management,

Inc.; Impala Asset

Management, LLC

Homebuilder and mortgage-finance company based

in CA that also sells land and lots.

June 10 Home Building Bonterra Builders, LLC AV Homes, Inc. Designs and builds new homes in the Carolinas.

June 1Building

MaterialsDuBROOK Concrete, Inc. U.S. Concrete, Inc.

Manufactures and delivers ready-mixed concrete in

north VA with 3 RMC plants and 42 mixer trucks.

May 22Building

Materials

Colonial Concrete

Company, Inc.U.S. Concrete, Inc.

Produces ready-mix and other concrete products in

northeast NJ.

May 12Building

Materials

A Leading Cement

Terminal in Puerto Rico

Cementos Argos

S.A. Putney Capital

Management, LLC

A reception, storage, and distribution terminal

in PR.

May 4Building

Materials

Holcim (US) Inc., Slag

Grinding PlantEagle Materials Inc. Holcim (US) Inc.

Divestiture of a slag grinding plant in South

Chicago.

Mergers and Acquisitions





Announce

Date

Industry

Subsector Target/Issuer Buyers/Investors Seller Description

May 4 Home Building Fairmont Homes, Inc. Cavco Industries, Inc.Provides manufactured and modular homes based

in IN.

May 1 Home Building JEH Homes, LLCTaylor Morrison Home

Corporation Designs and builds homes based in Alpharetta, GA.

April 29 NonresidentialCornerstone Environmental

Group, LLCTetra Tech, Inc.

Operates as an engineering and environmental

consulting, and field services company with

operations across the U.S.

April 24 Home Building Pacific Ridge Homes DR Horton Inc.

Homebuilder specializing in design and construction

of new homes and communities in greater Seattle

area.

April 22Building

Materials

Holcim Ltd.,

Cement Facilities in USAESSROC Cement Corp. LafargeHolcim Ltd. Divestiture of cement facilities in U.S.

April 17Building

Materials

Lafarge North America

Inc., Cement Assets

Continental Cement

Company, LLC Lafarge North America Inc.

Divestiture of cement plants and distribution

terminals in the US, while acquiring a distribution

terminal in IA.

April 2Building

Materials

Ferrara Brothers Building

Materials Corp.U.S. Concrete, Inc. Concrete manufacturer based in NY.

Mergers and Acquisitions





Ticker Exchange

Stock Price at 6/30/15

LTM Price Range

Enterprise Value

LTMLTM

Margin EBITDA/

Rev.

LTM MultipleForward Multiples

High Low Rev. EBITDA EV/Rev. EV/EBITDAEV/

EBITDA

Residential

Beazer Homes USA Inc. BZH NYSE $19.95 $21.33 $14.20 $1,954.03 $1,540.47 $43.49 3% 1.3x 34.1x 12.3x

Comstock Holding Companies, Inc. CHCI Nasdaq 3.90 9.94 3.50 61.83 51.09 (0.15) 0% 1.2x 95.1x 0.0x

DR Horton Inc. DHI NYSE 27.36 29.29 19.29 13,086.66 10,124.00 1,124.40 11% 1.4x 13.3x 10.7x

Hovnanian Enterprises Inc. HOV NYSE 2.66 5.20 2.59 2,434.17 2,164.07 101.83 5% 1.1x 39.9x 19.4x

KB Home KBH NYSE 16.60 18.98 11.76 3,906.00 2,588.35 148.99 6% 1.5x 26.6x 16.0x

Lennar Corporation LEN NYSE 51.04 53.67 35.74 16,779.81 8,634.72 1,082.09 13% 1.9x 13.9x 12.2x

LGI Homes, Inc. LGIH Nasdaq 19.78 22.21 12.21 583.96 480.45 59.42 12% 1.4x 11.2x 9.1x

MDC Holdings Inc. MDC NYSE 29.97 31.23 23.67 2,104.49 1,785.71 100.93 6% 1.2x 20.8x 17.6x

NVR, Inc. NVR NYSE 1,340.00 1,387.40 1,040.83 5,569.82 4,741.15 549.40 12% 1.2x 10.9x 10.2x

PulteGroup, Inc. PHM NYSE 20.15 23.36 16.56 8,647.36 5,830.87 787.16 13% 1.4x 11.4x 9.3x

Toll Brothers Inc. TOL NYSE 38.19 40.33 28.92 9,591.47 4,113.58 514.53 13% 2.3x 18.1x 14.9x

Median $20.15 $23.36 $16.56 $3,906.00 $2,588.35 $148.99 11% 1.4x 18.1x 12.2x

Average $142.69 $149.36 $109.93 $5,883.60 $3,823.13 $410.19 8% 1.5x 26.8x 12.0x

All figures reported in millions, except per share data

Source: Capital IQ

Bellwether Stocks & Industry Participants





Ticker Exchange


LTM Price Range

Enterprise Value

LTMLTM

Margin EBITDA/

Rev.



EBITDA

Building Materials

Eagle Materials Inc. EXP NYSE $76.33 $105.69 $68.54 $4,350.63 $1,085.08 $312.60 29% 4.1x 12.5x 10.9x

Martin Marietta Materials, Inc. MLM NYSE 141.51 155.98 103.09 11,164.73 3,179.60 707.78 22% 3.8x 17.1x 12.5x

MDU Resources Group Inc. MDU NYSE 19.53 35.41 19.22 6,221.27 4,110.05 450.44 11% 1.3x 7.5x 8.8x

Summit Materials, Inc. SUM NYSE 25.12 28.57 19.36 1,681.49 1,287.78 174.48 14% 1.3x 10.5x 6.6x

US Concrete, Inc. USCR Nasdaq 37.89 40.93 21.48 818.17 793.13 83.62 11% 1.1x 10.2x 7.6x

Vulcan Materials Company VMC NYSE 83.93 93.07 54.10 13,105.78 3,155.04 678.93 22% 4.3x 21.0x 15.7x

Cemex SAB de CV (ADR) CX NYSE N/A N/A N/A N/A N/A N/A 19% 2.0x 11.2x 0.0x

CRH PLC (ADR) CRH NYSE N/A N/A N/A N/A N/A N/A 9% 1.2x 13.9x 0.0x

HeidelbergCement HEI GR N/A N/A N/A N/A N/A N/A 17% 1.6x 8.9x 8.0x

LafargeHolcim Group LHN VTX N/A N/A N/A N/A N/A N/A 19% 1.8x 9.1x 9.0x

Median $57.11 $67.00 $37.79 $5,285.95 $2,221.41 $381.52 18% 1.7x 10.8x 8.4x

Average $64.05 $76.61 $47.63 $6,223.68 $2,268.45 $401.31 17% 2.3x 12.2x 7.9x

Roads, Bridges, and Highways

Granite Construction Inc. GVA NYSE $35.51 $39.09 $30.44 $1,279.14 $2,299.04 $115.29 5% 0.5x 9.5x 7.0x

Sterling Construction Co STRL Nasdaq 4.00 10.01 2.23 106.33 637.99 (6.06) -1% 0.2x NM 26.2x

Tutor Perini Corporation TPC NYSE 21.58 32.51 20.07 1,843.49 4,831.47 230.79 5% 0.4x 6.7x 6.5x

Median $21.58 $32.51 $20.07 $1,279.14 $2,299.04 $115.29 5% 0.4x 8.1x 7.0x

Average $20.36 $27.20 $17.58 $1,076.32 $2,589.50 $113.34 3% 0.4x 8.1x 13.2x


Source: Capital IQ


Note: CX, CRH, HEI, and LHN report in foreign currency. Margin and multiples unaffected and shown for analysis.





Ticker Exchange


LTM Price Range

Enterprise Value

LTMLTM

Margin EBITDA/

Rev.



EBITDA

Nonresidential

Aecom Technology Corporation ACM NYSE $33.08 $38.24 $24.82 $9,407.81 $15,828.77 $863.16 5% 0.7x 11.9x 8.4x

Chicago Bridge and Iron Company N.V. CBI NYSE 50.04 70.27 32.16 7,451.80 13,085.28 1,269.05 10% 0.6x 5.9x 5.7x

Dycom Industries Inc. DY NYSE 58.85 60.82 24.84 2,429.93 1,925.90 222.27 12% 1.3x 10.9x 9.0x

EMCOR Group Inc. EME NYSE 47.77 48.84 38.68 2,963.61 6,523.28 345.88 5% 0.5x 8.8x 8.0x

Fluor Corporation FLR NYSE 53.01 79.20 51.80 7,022.67 20,254.03 1,348.13 7% 0.3x 5.0x 5.4x

Jacobs Engineering Group Inc. JEC NYSE 40.62 55.00 37.87 5,278.96 12,216.32 783.54 6% 0.4x 6.6x 7.3x

MasTech, Inc. MTZ NYSE 19.87 32.10 15.34 2,841.42 4,616.65 348.95 8% 0.6x 7.3x 6.4x

Quanta Services, Inc. PWR NYSE 28.82 37.49 25.34 6,269.71 7,907.30 623.66 8% 0.8x 8.4x 7.1x

Median $44.20 $51.92 $28.75 $5,774.33 $10,061.81 $703.60 7% 0.6x 7.8x 7.2x

Average $41.51 $52.75 $31.36 $5,458.24 $10,294.69 $725.58 8% 0.6x 8.1x 7.2x


Source: Capital IQ




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Mercer Capitals Value Focus: Construction Industry | Q2 2015