Sustainable Land Development Today - April 2008 - (Page 10) FINANCE What Really Matters to the Financial Markets? An examination of the relationships between specific economic indicators, episodic events, and financial metrics makes clear the influences driving the value of individual E&C companies. By Curt Young F rench philosopher Étienne Gilson once wrote, “History is the only laboratory we have in which to test the consequences of thought.” Gilson’s statement is wise, and yet, few people would argue that history provides a road map for the future since each experience is subject to an infinite set of variables, virtually guaranteeing its unique outcome. Nevertheless, studying history provides a better understanding of the relationships between variables and outcomes. This article explores how specific economic indicators, episodic events, and financial metrics have influenced the historical value of publicly traded engineering and construction (E&C) companies. In addition, the article examines the correlation between the general stock market and the market for E&C companies. Examining these relationships makes apparent the influences driving the value of individual companies within the industry as well as the industry as a whole. For this analysis, publicly traded E&C companies in the study were segmented into four groups: I Architectural, engineering, and environmental consulting firms (“A/Es”) I Construction contractors (“contractors”) I Basic construction materials suppliers [construction aggregates, cement, and asphaltic and cement-based concrete] (“materials”) I Residential homebuilders (“homebuilders”) Five of the E&C firms (Fluor, Foster Wheeler, Hill International, Jacobs Engineering, and The Shaw Group) were included in both the A/E and contractor groups since they have major operations in both aspects of the industry and are heavily involved in design/build services. Similarly, Centex was included in both the contractor and residential homebuilding categories. For better comparative analysis, the contractor group was further divided into three subgroups with common types of construction activities: I General commercial and industrial construction (“general”) I Heavy civil, highway, and infrastructure construction (“heavy/highway”) I Specialty contractors, such as electrical, mechanical, telecom, drilling, and structural steel construction (“specialty”) Exhibit 1 provides a listing of the companies included within each category. Studying the recent, overall E&C market performance offers insight into how specific factors affect the value of these E&C companies. As measured by growth in gross domestic product (GDP) over the past ten years, the U.S. economy has been remarkably strong and stable. Quarterly GDP figures, based on seasonally adjusted annual rates, from the second quarter of 1997 through the second quarter of 2007 has steadily risen, climbing at an average annual rate of 5.3 percent. The E&C industry has benefited from this economic expansion, as the total amount of construction put in place has risen from approximately $648 billon in June 1997 to more than $1.1 trillion in June 2007, an average annual increase of more than 6.1 percent. In other words, the E&C industry has been expanding at an even faster rate than the overall economy over the past ten years, with construction put in place climbing from 7.9 percent of GDP in June 1997 to more than 8.5 percent of GDP in June 2007. E&C companies have thrived under these conditions. The E&C industry has significantly outperformed the S&P 500 over the past ten years. Between July 1997 and June 2007, $1,000 invested in the S&P 500 would have returned $1,698 (a 5.4 percent annual return); whereas, that same $1,000 would have returned $3,629 (13.8 percent annual return), $3,968 (14.8 percent annual return), or $6,958 (21.4 percent annual return), if invested in engineering and architectural firms/contractors, basic construction materials companies, or residential homebuilders, respectively, during the same period. E&C companies have also benefited from a widespread expansion in valuation multiples. Exhibit 2 displays the median value of various valuation multiples for the respective E&C groups on June 10 April 2008 Sustainable Land Development Today
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.