Valuation of the metal fabrication industry

Weekly Corporate Growth Report, Mar 4, 2002 by Dolbeck, Andrew

The fabricated metal industry, SIC Group 34, covers establishments engaged in fabricating ferrous and nonferrous metal products including tools, cutlery, general hardware, fabricated structural metal products, metal forgings, metal stampings, and a variety of metal and wire products. Metal fabrication is distinct from the primary metals industry, SIC Group 33, which smelts and refines metals from ore and scrap, and which manufactures basic metal products by casting, rolling and alloying.

Metal Fabrication in Today's Economy

The fabricated metal industry has been hard hit by the current economic downturn, with many companies in this group reporting lower bottom line results for 2001 than for the previous year.

Companies that fabricate metal for the aerospace industry must face weaker prospects as reduced commercial air traffic decreases the demand for aircraft construction. While increased military spending may partially alleviate this effect, projections for this sector remain less than optimistic. Companies crafting metal parts for the automotive industry are also facing decreased demand. Trinity Industries, which manufactures metal parts for a variety of industries, has been hit with decreased demand for railroad cars, with orders from the railroad industry remaining at their lowest levels in over a decade.

The Industry Fights Back

Companies in the industry are executing cost-cutting measures, including plant shutdowns, inventory reductions and efficiency improvements. A current construction industry trend towards "short-list" bidding, a system where only a limited number of trusted fabrication companies compete for a given assignments has resulted in a stronger focus on company relationships.

One source of efficiency improvement is modern technology. Recent advances in software technology and computational power have made it possible for fabricators to run extremely complex modeling simulations in a reasonable amount of time. Benefits attributed to running simulations include more accurate price quoting, faster time to market, easier troubleshooting, and improved product quality. Costs are also saved as less time is spent developing and testing new processes on production equipment.

While it is unlikely cost-cutting initiatives will be enough to avert a down year in 2002, such measures should leave fabrication companies in a better position to act when economic recovery eventually materializes.

M&A Activity in the Industry

Another way some companies in the industry are fighting back is by seeking acquisitions or merger partners. In 2001, fabrication companies such as Chicago Bridge & Iron and Dynamic Materials Corporation, both of which purchased specialty metal operations from smaller companies, expanded their capabilities through acquisition.

In general, however, merger and acquisition activity within the industry decreased during 2001. Most metal fabrication companies sold during 2001 were sold for less than one year's revenue, a decrease from the average price/revenue ratio for 2000.

Conclusion

Highly dependant on demand from other industries, the metal fabrication industry is definitely feeling the current economic downturn. Companies relying on business from the automotive and aerospace industries have been especially hard hit. The industry is responding to hard times by working to control costs, improving efficiency and fighting for contracts.

Sources: Done Deals, Value Line, Appliance Manufacturer, Journal of Business, OSHA