BDO Capital Engineered Components & Materials Q4 2019 M&A Review and Outlook

December 2019

At BDO Capital Advisors, we focus on advising companies that are involved in the design, fabrication, and/or distribution of highly Engineered Components & Materials (EC&M). Our clients in this sector serve many industries, including:

-Aerospace & Defense                   -Durable & Non-Durable Goods                 -Medical Devices
-Automotive Components              -Electrical Equipment                                  -Specialty Chemicals
-Building Products                          -Electronic Equipment & Instruments         -Transportation Equipment
-Construction Materials

Key Observations:
Deal Activity Expands Further as Economic Outlook Negatively Impacts Valuations

Sector Deal Volume Up Nine Percent; Multiples Decline by 1.2x

U.S. M&A activity in the Engineered Components & Materials (EC&M) sector rose by nine percent during the first three quarters of 2019. The sector now represents approximately 19 percent of overall U.S. deal volume. The growth was primarily due to a surge in closings during Q1. Q2 and Q3 activity was flat when compared with 2018 results. Private equity (PE) continues to look upon the sector favorably and participated in approximately 42 percent of sector closings during the year-to-date period.

The big story concerns valuation. The average EBITDA multiple for the sector declined from 9.0x in 2018 to 7.8x for the 2019 YTD period through September. Buyers have been more cautious given the economic outlook. It is also likely that deal mix has continued to shift towards sellers with less attractive profiles. This is to be expected given the stage of the economic upcycle as well as the accelerating retirement rate of baby boomers who own companies.

U.S. Economy is Decelerating as Continued Slow Growth is Expected

Annualized GDP grew by 1.9 percent during Q3 2019 according to the advance estimate, down from 2.0 percent and 3.1 percent in Q2 and Q1, respectively. Despite this deceleration, the U.S. compares favorably to most other industrialized economies. The panel of economists routinely surveyed by the Wall Street Journal indicates growth should continue at rates between 1.6 percent and 1.9 percent over the next 12 months. While not citing a specific percentage, Federal Reserve Chairman Powell seems to agree, having told the congressional Joint Economic Committee in Washington in mid-November that “there is no reason” that growth should not continue.

Consumers remain upbeat according to the latest Index of Consumer Sentiment, given low unemployment (at 3.6 percent in October), recent wage growth, and low interest rates. This is impactful given that consumers represent approximately two-thirds of GDP. The manufacturing sector, however, has not performed as well. According to the October ISM Purchasing Managers Index, the manufacturing sector has been in contraction for the last three months. Concerns about tariffs are a major factor dampening sentiment.