Market Update

Heading into the second half of 2021, market-wide demand spikes continue as consumers unload savings accumulated when businesses closed, stay at home orders were enforced, and $5tn in business and consumer stimulus was circulated. From these demand surges, Q1 ’21 corporate profits and fixed asset investment have risen year over year, growing 15% and 4%, respectively. Further, indexes from the Institute for Supply Management (“ISM”) improved from 2020 bottoms of approximately 40% to 64% for ISM’s Services Index and 59% for ISM’s Manufacturing Index, signaling a return in business performance and economic growth. However, supply chain disruptions and supply and demand imbalances leave markets turbulent.

Due to strong rebounds in economic activity, current demand is outpacing global supply chain capacity, leading to inventory shortages and shipping delays. Transportation costs are rising as popular freight routes are backlogged. At the Port of Los Angeles, dozens of ships and several hundred thousand containers remain parked offshore. Similar congestion is seen at major ports throughout the US. Rail terminals and transfer points are equally as crowded. Further, manufacturers are overwhelmed as labor shortages and COVID related precautions limit production capacity. This and forward purchasing of industrial inputs to combat expected supply chain issues exacerbate supply pinches and prolong delivery timelines.

Combined, these factors result in demand far outpacing supply, increasing prices of goods and essential input commodities like lumber and steel. Supply chains and the processes and products they support are only as strong as the weakest link. Thus, regardless of expectations of normalized demand, ongoing supply chain disruptions and the upcoming holiday season will likely extend shortages and inflationary pressures into 2022.

Demand Spike Case Study: Motorized Outdoor Recreational Equipment (“MORE”)

• Excess leisure, record savings, and demand for socially distanced recreation drove consumer spending on MORE.
• Q1 revenue growth among public MORE companies was 41% higher than Q1 2019, demonstrating significant demand increases in a market with high recessionary elasticity.
• High performance during economic uncertainty resulted in MORE companies receiving premium valuations.
• Excess demand results in supply chain disruptions that are causing inventory shortages and price increases.

Value Drivers

Industria has identified the following characteristics that support performance, increase resiliency, and drive valuations despite the potential for economic instability.

• Adaptable Supply Chains: 2020 and the first half of 2021 highlighted the importance of reliable supply chains. Businesses able to mitigate supply chain strains or avoid regional disruptions through diversifying vendor networks are more attractive to acquirers and investors.
• End Market Diversity: Exposure to volatile end markets such as oil and gas can greatly impact performance while pharmaceuticals, food and beverage, or consumer goods are viewed favorably. Serving diverse end markets is viewed as a hedge against individual sector risks and leads to higher valuations.

M&A Update

Strong M&A activity is driven by buyers and sellers seeking to capitalize on the macroeconomic environment and widespread capital availability.

• M&A Market: Global M&A value topped $2.8tn in the first half of 2021, a 133% increase from the same period in 2020.
• Capital Availability: The continued low interest rate environment provides buyers access to low-cost capital and incentivizes an increase in deal cadence, premium valuations, and higher levels of buyer competition.
• Tax Policy Shifts: Anticipated tax increases on long-term and unrealized capital gains is driving owners to evaluate exit opportunities.

We hope you found this insightful. Please feel free to contact anyone on the Industria team – we would welcome the opportunity to discuss our viewpoints. Don’t wait. Let’s start the conversation.