Sustainable Land Development Today - April 2008 - (Page 11) 30, 1997, and June 30, 2007, as well as over the course of the entire ten-year period. In comparison to historic norms, each of the E&C groups, with the exception of residential homebuilders, is currently trading at exceptionally high multiples. For example, on June 30, 2007, the median total enterprise value (TEV)/Revenue multiple for publicly traded general contractors was 0.98x, which means that investors were willing to pay $0.98 for every $1 of revenue generated by a general contractor. Over the past decade, investors, on the median, have only been willing to pay $0.54 for every $1 of revenue generated by a publicly traded general contractor. On the surface, this difference may seem inconsequential. However, consider that over the most recent trailing 12-month period, the average revenue of the general contractors included in our study was over $6.8 billion — the difference becomes staggering. Applying the math, a $6.8 billion contractor valued at 0.98x revenue would have a TEV of roughly $6.7 billion, whereas that same contractor valued at 0.54x revenue would have a TEV of roughly $3.7 billion, equating to a valuation difference of $3 billion. Since continued multiple expansion is highly improbable (i.e., investors will only pay so much for a dollar of revenue or a dollar of earnings), in the near term, the value of E&C companies is more likely to be driven by the strength of the construction market and the overall economy. In fact, some industry observers might argue that an industry trading at the upper end of its valuation range is likely to be hypersensitive to a weakening of its economic environment. A dramatic example would be the dot-com bust. In the late 1990s, technology firms were trading at outrageous revenue and earnings multiples. Yet, once the exuberance faded and the economic environment began to turn, valuation multiples of technology firms were quickly depressed. While the E&C industry will likely never be subject to the same sort of irrational exuberance, if the current economic environment significantly deteriorated, valuation multiples of E&C firms could fall to much lower levels. Consequently, it is prudent to take an entire set of circumstances into consideration. The remainder of this article presents the individual economic factors, financial metrics, and episodic events that influenced the historical value of publicly traded E&C companies. For the ten-year period beginning July 1, 2007, and ending June 30, 2007, Circle 119 • or www.SLDTonline.com/webcard www.SLDTonline.com 11 http://bigrmfg.com http://bigrmfg.com http://www.SLDTonline.com/webcard http://www.SLDTonline.com
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