The Construction Services sector has experienced significant growth throughout the year, propelled by robust backlogs and increased sector spending. Despite challenges in the Residential segment, such as a notable decline in housing starts, other areas like Nonresidential construction have maintained strong revenue visibility. Federal support for infrastructure projects has particularly boosted demand in segments like Highway and Street and Sewage and Water Disposal, leading to considerable spending increases year-over-year.
According to data from the U.S. Census Bureau, spending in these segments rose by 12.6% and 21.8% respectively. Furthermore, the Infrastructure segment has seen substantial future contracted work, with backlogs reaching 10.2 months in August, up by two months compared to the previous year, according to Associated Builders and Contractors (ABC). The Commercial & Institutional and Heavy Industrial segments have also demonstrated healthy prospects, with backlogs rising to 9.5 months and 7.7 months year-over-year respectively.
Valuations Among Public Players Remain Robust, Bolstered by Strong Revenue Gains and Backlogs
Amidst this favorable market backdrop, participants in the Engineering and Design sector have attracted significant interest from buyers and investors. Providers offering a range of services, including energy efficiency solutions, civil engineering, utilities services, and wastewater services, are experiencing healthy demand as we approach the final quarter of 2023.
Optimism in the Engineering sector is fueled by the positive sentiment among industry players, as indicated by surveys conducted by the American Council of Engineering Companies. A vast majority of engineering firms hold a positive outlook on both the industry's condition and their overall finances. This positive sentiment is mirrored across the broader Nonresidential Construction market, with contractors anticipating sales and profit margin expansions in the coming months, according to ABC.
Construction M&A Draws Interest from Strategic and Financial Buyers Through Year-to-Date
Valuations among public players in the Construction Services sector remain robust, driven by strong revenue gains and healthy backlogs. Large strategic players have seen significant revenue increases, leading to robust pricing in equity markets. Engineering segment participants have particularly benefited from persistent project demand and revenue visibility, with companies like Stantec and AECOM reporting substantial year-over-year revenue growth and backlog expansions.
Despite a slight decline in M&A activity volume year-over-year, valuations have improved, indicating a favorable pricing environment for prospective sellers. Strategic buyers continue to dominate transaction activity, drawn to companies with defensible margins and strong revenue profiles. Financial buyers, though cautious due to elevated capital costs, are also actively pursuing acquisitions, particularly add-on acquisitions to enhance existing portfolios.
As we move forward into 2024, the Engineering sector is poised for continued growth and investment, supported by strong market fundamentals and sustained buyer interest.
