In recent business temperature checks of AEC and construction equipment sector firms, analysts see signs of post-pandemic recovery but continuing risks and warnings about over-optimism in estimating markets and financials.

In an Oct. 5 third-quarter preview of publicly held E&C firm financial results, Credit Suisse managing director Jamie Cook said “fundamentals for the group remain healthy, aided by above average visibility in backlog.” She sees technology improving workforce efficiency but also more risk of large project deferrals from higher commodity prices, continued supply chain disruption and lack of available skilled labor. 

For publicly owned equipment manufacturers, "expectations ... are appropriately cautious"  with clients reducing expansion projections due to the market uncertainties. We see risk [for manufacturers] to both the top line and incremental margins along with the risk of production cuts in the fourth quarter," said Cook. "As a result, we are cutting our 2021 earnings estimates for the machinery group by 5.5% and 2022 estimates by 7.7% on average. We expect supply chain risk ... to be an issue through the first half of 2022 at least."

Cook says demand "remains strong" among most industrial clients but "companies are reluctant to build 2022 order books, reflecting risk of elevated costs ... in 2022."  She projects that, as costs normalize with no commodity price hikes or major supply chain disruption, revenue growth and incremental margins will improve, with potential for an earnings per share "upside surprise in the back half of 2022 and into 2023."

AE and Design-Build Metrics

Based on its October survey of 303 public and private design and design-build firm financials, management consultant AEC Advisors notes median organic revenue growth declining last year, with firms of $25 million or less falling to 2.9% from 18.8% in 2019, and large firms over $2 billion with negative 1.5% growth. down from 5.5% growth the previous year.

AEC President Andrej Avelini said smaller firms "working earlier in the project life cycle, with more private sector clients that cut spending more suddenly felt the impact of the downturn faster." He added that large firms "were more exposed to" downturns in international markets, where lockdowns were longer and stricter than in the US.

AEC Advisors sees "robust growth expectations" for 2022, with work in the energy sector "leading the way,"

Rebecca Zofnass, a managing partner of industry consultant EFCG, says that "median doesn't tell the whole story," with its results survey of 190 AEC firms showing revenue trends ranging from -20% to more than 40%. She says, however, "compared to prior recessions, internal growth was impacted less in 2020 and is expected to recover much faster to pre-pandemic levels."  Median backlog is up in 2021 compared to both one year and six month levels. 

EFCG says firms estimate 5.6% growth this year and 7% for 2022, with 13% median profit margin in 2020 expected to hold for the next two years, although Zofmass warns of “overoptimism bias we usually see in the industry.”

Meanwhile, firm valuations are hitting new peaks with public markets and private equity buyers showing more interest in sector players performing in dynamic infrastructure, energy and climate change resilience markets that now also offer a "premium" because of environmental, social and governance (ESG) appeal to clients and investors.

The trend is set to accelerate with new proposed regulations on ESG investment reporting from the federal Securities and Exchange Commission and a US Labor Dept proposed rule published in the Federal Register Oct. 14 that would make ESG factors, particularly climate change, a more prominent measure in funds purchased for 401(k) retirement plans—reversing a Trump rule restricting such considerations.

Industry mergers and acquisitions tracked by consultant Morrissey-Goodale totaled 319 so far this year, which partner Mick Morrissey said on Oct. 8 already breaks the full-year record set in 2019.  "We're in uncharted waters," he said.

AEC sector acquirers backed by private equity cash are growing three times faster than public firms, with PE owners now expanding their buying interest to a wider array of companies, says AEC Advisors' Avelini. He says there now are about 80 PE-owned AEC firms, four times the number in 2010.