DWM - 2010 - Jan/Feb

Volume 11, Issue 1 - January/February 2010

Trend Tracker

Good Riddance, 2009
2010 Shows Many Signs of Promise
by Michael Collins

Last year began under such a terrible cloud of doubt that the first time I sat at my desk with my head in my hands and said to myself, “Just get through this year,” was, without exaggeration, January 15, 2009. As often happens in life, the situation improved steadily over the course of the year. The market provided several valuable opportunities in 2009 and, for companies that searched with particular diligence, there were others to be had as well.

In the Midst of Recovery
At the outset of the year, the United States was still embroiled in the worst financial crisis in the memory of most Americans. This Great Recession, as it is called, had every bit of the potential to wreak global havoc. The Fed and other bodies providing oversight of the financial system have learned the lesson that the best solution for uncertain times is increased liquidity. The financial markets have calmed, the United States has pulled back from the brink and the statistics coming out of the housing market are beginning to turn more consistently positive. The process of capitulation, wherein a market finds a bottom, has taken much longer than originally anticipated.

However, the turn in markets usually becomes apparent through observations of data, such as housing starts or existing home sales. During a decline, this data typically is negative month after month. As the market begins to find a bottom, the data is occasionally and almost inexplicably positive. During the recovery phase, the data is more often positive than negative. We are definitely entering the recovery phase, indicating that 2010 should be a better year in the residential sector than 2009.

Acquisitions to Continue
Looking to the year ahead, we would anticipate continued brisk merger and acquisition activity in the door and window industry. As in 2009, many transactions will be driven by the need of sellers to gain access to capital to continue operating. The latter part of 2010 may bring with it a number of sellers that have a year of black ink behind them and a desire to sell on relative strength. Larger, better capitalized strategic buyers remain in the market in force, seeking opportunities to expand their product offerings, their distribution channels and their geographic coverage areas. Private equity funds, too, remain active despite a poor year of fundraising in 2009. The fact is that these funds raised so much capital in 2007 and 2008 that there is still a huge overhang of capital of some $400 billion that must be placed in attractive investment opportunities. With the building products industry beginning to show signs of making a turn, dozens of these funds are looking here for deals.

Tax Credits Give Much Needed Boost
The key event in 2009 was, in our opinion, the way in which energy efficiency catapulted to the forefront of the building products industry. This came largely as a result of the $1,500 tax credit for doors and windows that met the much derided .30/.30 standard. We are aware of several owners who were considering selling their companies prior to the tax credit that decided not to do so, as a result of the uptick in sales driven by the credit. We are not aware of any companies that went out of business because they failed to capture additional sales driven by the tax credit. However, being unable to qualify for the credit certainly represented an undesirable obstacle faced by companies in that situation.

We believe the door and window industry will receive a dividend in 2010 as a result of the first time home buyer tax credit in 2009. Many of the homeowners who benefitted from this tax credit in 2009 will also be eligible for the $1,500 energy efficiency tax credit in 2010. This will add some strength to the remodeling market in the coming year, since buyers of existing homes tend to remodel them. Since the first time home buyer program has been extended, it is likely that a similar dividend will occur in 2011. In any case, a New Year is beginning that offers the appeal of a high likelihood of being a better year for many industry participants than the one coming to a close.

Michael Collins is vice president of the building products group at Jordan, Knauff & Company, an investment banking firm that specializes in the door and window industry. He may be reached at mcollins@jordanknauff.com. His opinions are solely his own and not necessarily those of this magazine.