Valuation of the metal fabricating industry

Metal fabricating companies are generally in the SIC #'s 3400 to 3499 These companies build industrial, commercial and residential proceedss out of metal. Their business arises are tied to the motion of the local and world economy. Metal fabricators are a, "capital intensive business". In a capital intensive business a unpretending rise in sales usually exhibits a good increase in profits. This is because one time the fixed costs are overlayed the incremental sales increase single has to cover the incremental take away from of manufacturing.

But the turn topsy-turvy is also true. A slight decrease in sales shows a slightly greater decrease in profits.

The metal fabricating industry is also known as, "smokestack America". The companies guard to be old, well-established firms with substantial azure collar employment. Because they are not in high increase "glamour industries", such as the Internet, software and bio tech companies, the metal fabricating companies vend for relatively low purchase price multiples. For example, the average metal fabricating company vends for 82% of annual sales, a price to earnings multiple of 240 and a purchase price to net/ worth ratio of 245

When you add in all of the seller's liabilities (current liabilities, drawn out term liabilities and intangible items) the purchase price paid plus the assumption of all liabilities shows a purchase price to sales ratio of 120 This is a relatively depressed purchase price multiple compared to other industries. That figure does not trap out the current assets and common liabilities assumed by the buyer

One of the reasons for the lower purchase price multiple is the conservative extension curve companies in the metal fabricating industry exhibit. Another reason is because of the historically lower profit rate produc by dint of the industry. For example, the average gin after tax profit for the companies in the Value Line classification as metal fabricating is 36% for 1996 up slightly from 1995's 35% The companies in our application of mind had a slightly higher 60% after tax profit In general, U industry shows a much higher rate of profitability. For example, the s & P 500 through November 1996 had an after tax profit of 946%

Metal fabrication is a mature industry with a retiring sales growth and modest profits, for a like reason the valuation of companies in this industry watchs to be lower than many other industries.

The forecast for the years 1997 to 2001 single expects non-residential fixed investment to become greater [i]or[/i] larger at 4% per year. Spending upon construction and durable goods are important markets for metal fabricating companies. The unpretending growth in non-residential fixed investments will bring into view modest sales and profit development for metal fabricating industry.

On the positive side the multiyear Federal highway bill is producing accelerated development for construction related equipment, supplies and hardware.

Copyright Quality Services Company Dec 16 1996

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