Volume 14, Issue 4 - May 2013


Taking Stock
Signs of Improvement and Success Strategies

by Michael Collins

Despite occasionally flickering in a negative direction on a month to month basis, the vast majority of key economic statistics and indicators continue to paint a picture of a growing recovery. Indeed, most door and window manufacturers and building products distributors who discuss their financial condition with us have confirmed sales are up versus this time last year. Even product segments that have been under extreme pressure throughout the downturn, such as sunrooms and patio rooms, are seeing increasing sales due to the improving economy.

Effects of Superstorm Sandy aside, companies are increasingly feeling the recovery. Cynics prefer to point out that “we’re nowhere near the levels of the good ol’ days.” That is undeniably true. The seasonally adjusted annual rate of construction of new privately owned housing stood at 917,000 homes in February of this year. This is down from the recent peak of 2.27 million which was achieved in January 2006. It is far less than the all-time peak since 1959, which was 2.49 million homes in January 1972. In fact, in the 650 monthly periods since 1959, the rate of home construction has been higher than February’s level in a whopping 585 of those months.

Sunny Spots are Abundant
The bright side, however, is that the February new home construction rate was up nearly 200 percent from the recent trough of 478,000 homes seen in April 2009. As highlighted in the last issue of DWM (see March DWM, page 6), some 41 door and window manufacturers have gone bankrupt since 2008. There are far fewer companies at the table to divide up whatever level of business the market provides. We’ve also seen an underinvestment cycle on the repair and remodeling side of the industry. The tax credit drove meaningful levels of sales and the most pressing upgrades will always be completed. However, when employment fears hang over a household, they draw in the reins on remodeling and a variety of other purchases. With the economic picture improving, this promises to be a better year for remodeling, as it is shaping up to be in new construction.

The signs of recovery are everywhere. Fannie Mae recently announced that it believes it will be able to repay some $60 billion in taxpayer bailout funds sooner than expected. A new home development in California priced at $400 to $500 per square foot recently sold out in a single day. The luxury market is doing well, as evidenced by a residential high-rise in New York that has sold a third of its units, despite being two years away from completion. The average asking price of units in that project is just shy of $7,000 per square foot. With regard to the huge excess inventory of unsold homes foreclosed upon and now owned by banks, institutional investors are helping whittle down the excess holdings. Private equity funds and hedge funds have invested billions in converting foreclosed homes into single family rental properties in key markets.

A Continued Upturn
If things are getting better, the question becomes where to focus one’s energy in the year ahead. A strategy that many companies are exploring is acquiring or entering into a joint venture with a company with truly synergistic products. This would be a company that, if you owned it or had access to its products on a special pricing basis, would allow you to increase sales to existing customers and win new customers in segments that are currently closed to you. To the extent that there are component suppliers or even competitors that could provide a company with these types of advantages, it is worth at least a conversation to explore the possibilities. Many industry participants were hit by the downturn just as they were feeling the desire to retire. If the last few years haven’t been enough to increase an owner’s desire to retire, nothing could. Many of these owners are looking for a way to exit their company and retire. They prefer to partner with a company that can address what are usually the two most important factors for a selling owner. The first is that they sell their company at a fair price in a clean and efficient transaction. The second nearly ubiquitous desire is to see the company placed in the hands of a group that can increase sales and strengthen the opportunities available to the employees that helped the owner achieve their goals. y

Michael Collins is an investment banker and a partner in Building Industry Advisors. He specializes in mergers and acquisitions in the door and window industry.


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