THREE CHEERS FOR METALBENDERS: An Industry Valuation Update
Engineered metal parts manufacturers are enjoying a nice recovery and robust M&A activity
If you machine it, stamp it, bend it, roll it, shear it, forge it, or cast it, chances are you’re selling more of it, and earning more profit doing so, versus last year. Such is the environment for many of the thousands of domestic producers of machined and other engineered metal components.
Recovering end markets for automobiles, trucks, airplanes, machinery, capital equipment, pumps, appliances and other mechanical products are driving up secondary demand for their componentry. Higher top line revenue at parts producers are combining with the production cost efficiencies put into place during the most recent down cycle to yield significantly improved profitability despite higher raw material prices and energy costs. Domestic producers of close tolerance, low-volume and performance-critical engineered metal components also continue to enjoy relative protection from offshore suppliers.
As a result, the stock market has rewarded equity valuations in this cyclical sector. Our stock market index of publicly-traded, engineered metal parts manufacturers has increased threefold from its low point in early 2009. This index is once again approaching its last cyclical peak, experienced at the end of 2007. This meteoric rise has prompted many industry analysts to rate some of this sector’s stocks as “Holds”, telegraphing their guidance as to peaking valuations.
M&A activity in the engineered metal parts industry has heated up as well. As GDP continues to slowly advance, industry players (both buyers and sellers) are taking advantage of the improved credit markets and unprecedented amounts of uninvested cash to energize growth. Most recently, in March 2011 Allegheny Technologies will merge with engineered metal parts company Ladish Co. for $850 million in cash and stock, a deal priced at 2.1 times revenue and 13.7 times EBITDA. This is a synergistic M&A valuation to be sure, but one that reveals the upside opportunities of the combined entity. That robust sale process also provides a real-time window into intensity of competitive interest for acquiring well-positioned component companies.
In conclusion, owners of engineered metal components companies should take heed. If your company has realized the top and bottom line improvements enjoyed by many industry players, and you’ve been waiting for the ideal time to consider a sale of all or a portion of your company, the M&A market looks ripe.