Q4 2018 Industrial Quarterly Newsletter

TKO Miller Market Analysis 

• Most experts remain optimistic for at least the first half of 2019, but believe there is elevated likelihood of a recession in the next 6-18 months.
• TKO Miller’s proprietary Industrial and Construction Services Index (see below) recorded a sharp decline (from 10.4X to 7.5X TEV/EBITDA) from Q3 to Q4, indicating falling valuations for publicly traded companies in these sectors.
• Despite the strongest year for GDP growth in a decade, a more challenging year for the industrial and construction sectors is expected to follow, as they are impacted by broad macroeconomic factors such as slowing manufacturing growth in China and volatile energy markets.
• Demand and valuations for middle market companies typically lag the macro markets slightly, but a broader economic downturn will eventually lead to declining middle market valuations.

Industrial and Construction Services News

U.S. Construction Starts Expected to be Flat in 2019 

U.S. construction starts are expected to remain relatively flat in 2019, rising from $807 to $808 billion, according to Dodge Data. The forecast expects a continuation of the industry’s deceleration, which began in 2016 when growth in total starts dropped from the 11-14% gains seen from 2012 to 2015 to an increase of 7%. The biggest challenges the industry faces are rising interest rates, rising material costs, tariff increases, and the ongoing shortage of skilled laborers.
https://www.equipmentworld.com/construction-flat-2019/ 

U.S. Manufacturing Slumps in December, Muddying Outlook for 2019  

Five Federal Reserve indexes of regional manufacturing all slumped in December, the first time they’ve fallen in unison since May 2016 and the latest evidence that a pillar of the U.S. economy has started to wobble heading into next year. More than 20% of manufacturers said that their outlook worsened this month, according to the regional Fed report. Cities under the weakening Fed factory gauge include Dallas, New York, Philadelphia, Richmond, VA, and Kansas City, MO. https://www.latimes.com/business/la-fi-fed-manufacturing-20181231-story.html 

Industrials Sector Ranking: Outlook for Market Performance Remains Cautiously Positive 

Global manufacturing largely remains positive but growth rates have slowed, as would be expected, with recent Purchasing Managers’ Index readings in most major countries staying in territory depicting expansion, but slipping from their highs. Positive factors that may affect the industrials sector include potential productivity gains as corporate balance sheets remain relatively cash-rich, which should help push management teams to invest in new, more-efficient equipment to help offset weaker productivity, and relatively low manufacturing inventories, signaling the possibility of a demand inspired rebuilding phase. Potential negative factors include more aggressive Fed action and international trade disputes. https://www.schwab.com/resource-center/insights/content/industrial-sector 

Industrial and Construction Services Valuation Index 

Middle Market Valuation Multiples 

By Timothy Oleszczuk on Jan 6, 2019 7:00:00 AM