Precision Manufacturing Market Update – January 2024

Valuations Normalize in the Precision Manufacturing Market Drawing Buyer Interest

M&A volume in the Precision Manufacturing market has declined a modest 6.4% year-over-year (YOY) in November 2023 with 191 announced or completed deals compared to 204 deals in the prior year period. The space has demonstrated resilience as broader merger and acquisition (M&A) markets declined 24.0% through 2023, according to Capstone’s Q4 2023 Capital Markets Update. Average disclosed multiples in the space have declined YOY coincident with the relatively lower availability of debt capital and the surge in interest rates. Currently, transaction multiples are averaging 1.7x EV/Revenue and 9.5x EV/EBITDA, a decline from 2.1x and 12.0x revenue and EBITDA multiples garnered in 2022.

Technological advancements in addressable end markets such as Automotive, Medical Technology, Automotive, and Electronics have continued to drive demand for Precision Manufacturing. Sector fragmentation has drawn an active pool of strategic buyers, which have accounted for small- and medium-sized enterprises’ (SMEs) consolidation efforts in the space. Strategic buyers accounted for 66.5% of sector transactions through year-to-date (YTD) 2023, compared to 57.8% during the prior year period. These buyers have capitalized on a depressed valuation environment, while private equity deals have continued to decline in a high interest rate environment. Financial acquirers accounted for 33.5% of total deals in YTD 2023 versus 42.2% in YTD 2022.

The current precision manufacturing M&A market is being driven by public and private corporate acquirers and private equity-backed strategics; countering this strong activity has been a meaningful pull-back by private equity firms completing platform acquisitions. The resilience of the former group reflects opportunistic buying and debt financing supported by the strength of the buyers’ balance sheet and existing debt financing relationships in what is otherwise a challenging debt market.

David BenchManaging Director, Capstone Partners

Key End Markets Expand, Manufacturing Levels Moderate

Precision Manufacturing market fundamentals have demonstrated defensibility following a period of rapid growth post-pandemic. Notably, manufacturers’ new orders for ferrous metal foundries grew 4.1% YOY in October, leading new orders growth in the Primary Metals category, while fabricated metal products grew in six straight months, rising 0.1% month over month (MoM), according to the U.S. Census Bureau.^1,2 Manufacturers’ new orders normalized in November 2023, totaling $592.9 billion, a slight increase from $574.9 billion in the prior year period, according to the St. Louis Federal Reserve.³ Similarly, Manufacturers Inventories have remained at healthy levels, totaling $857.1 billion in November 2023, a 0.2% decline from $859 billion in November 2022, according to the St. Louis Fed.⁴ These tailwinds are projected to establish a healthy backdrop for manufacturers that saw demand drop in early 2023.

A continued resurgence in orders is expected heading into 2024, with sector optimism evidenced by the 16% YOY return growth in the Industrial Select Sector SPDR Fund (ARCA:XLI). As macroeconomic headwinds in other geographies force manufacturers stateside, the expected growth in demand for precision manufacturing has driven sector players to seek organic and inorganic growth avenues to fulfill the influx.

Downstream Precision Manufacturing market demand from consumers has remained healthy, driven by key end markets such as Electronics, Healthcare, Automotive, Aerospace, and Defense. Of note, Sanmina Corporation (Nasdaq:SANM), a global integrated manufacturing solutions provider, demonstrated 13% YOY revenue growth in Q4, according to its recent earnings report.⁵ In addition, demand in the Semiconductor Lithography Equipment, Medical, and Automotive segments have remained healthy, with new programs and government funding bolstering Sanmina’s pipeline. The company’s BEAD program has committed to delivering broadband networks in all households across the U.S., a $43 billion opportunity financed by federal government. These long-term opportunities derived from the electronic revolution in Industrial markets have encouraged the pursuit of organic and inorganic growth strategies to bolster business segments.

Industry 4.0 Expected to Require Greater Precision, Fueling Acquisition Activity

The Fourth Industrial Revolution has marked the beginning of a fully integrated ecosystem of manufacturing capabilities. Emerging trends in Electronics, Healthcare, Automotive, Aerospace, and Defense end markets require greater accuracy, with companies that demonstrate such capabilities garnering healthy buyer appetite. Several notable transactions reflecting this trend are outlined below.

• TechPrecision Corporation Announces Acquisition of Votaw Precision Technologies (November 2023, $110 Million)

TechPrecision (Nasdaq:TPCS) announced its intent to acquire Votaw Precision Technologies, a manufacturer of precision components for Aerospace, Defense, and Commercial industries for $110 million (November). TechPrecision operates through two segments, Ranor and Stadco, providing precision manufacturing to Naval and Aerospace Defense end markets in addition to Nuclear and Medical Systems. The deal is expected to double TechPrecision’s revenue and EBITDA while saving millions in overhead and capital expenditures by redeploying its current Stadco subsidiary into Votaw’s, according to a deal press release.⁶

“As a leading supplier of highly engineered precision Spaceflight & Defense Hardware and Mission & Safety Critical Components, we believe Votaw is well-positioned on several leading manned and unmanned space platforms and across a number of high-profile defense and aerospace programs to have continued success and growth in these areas," commented Alexander Shen, CEO of TechPrecision, according to the press release.

• Dubal Holding Acquires Thermalex (November 2023, Undisclosed)

DubaI Extrusion Investment (DEI) acquired Alabama based Thermalex, an aluminum extrusion company specializing in multiport extruded tube (MPE). The acquisition expands DEI’s North American operations as global demand for MPE tubes in Automotive and HVAC sectors has played a key role in the Electric Vehicle (EV) markets.

“This further marks a significant step for DEI towards stimulating growth in the aluminium downstream value chain," said CEO of Dubal Holding, Ahmad Hamad Bin Fahad, in a deal press release by Gulf Construction.⁷ "The future of Thermalex Inc. appears promising as demand for its specialized products from the rapidly developing electrical vehicle manufacturers is expected to increase over the coming years," added Diego Daluisio, President of Thermalex.

• AMETEK Announces Acquisition of Paragon Medical (October 2023, $1.9 Billion, 3.8x EV/Revenue)

Global leader in electronic devices manufacturing, AMETEK (NYSE:AME), announced its acquisition of Paragon Medical, a manufacturer of highly engineered medical instruments, for $1.9 billion in October, valuing the company at 3.8x EV/Revenue. The deal expands AMETEK’s presence in the Medical Technology space by adding new market segments, geographies, and a diverse blue-chip customer base, according to a press release.⁸ Paragon’s product portfolio consists of orthopedics, minimally invasive surgery, robotic surgery, and drug delivery, all complimentary to AMETEK’s current capabilities. Paragon has reported annual sales of $500 million and will immediately be accretive to AMETEK’s earnings, according to the press release.

Robust Demand for Downstream Metals Sparks OEM Deal Activity in the Metal Fabrication Market

The Metal Fabrication market has been upheld by strong fundamentals as reduced volatility in commodity pricing and elevated original equipment manufacturer (OEM) demand in key end markets has created a favorable backdrop for heightened M&A activity moving into 2024. The Commodity market in the past four years has been highly susceptible to price fluctuations caused by macroeconomic trends, notably Chinese steel production cuts caused iron ore to spike in 2022, and the ongoing Ukrainian-Russian war, which impacted Nickel commodity prices. In 2023, prices normalized as domestic production and manufacturing demand remained healthy. While unforeseen headwinds, such as the Automotive industry strike, could halt consumption in select end markets, overall, 2024 is well positioned to capture pent up orders.

During elevated commodity pricing environments, upstream manufacturers opted to pass inflated costs down distribution networks and onto the end-user. OEMs garnered record revenues and margin expansion throughout 2022 and have since seen revenues normalize. While supply chains were strained during and after the pandemic, an elevated pricing environment has boosted sector players. The Producer Price Index (PPI) for Steel soared in 2022, rising 7.4% YOY, and has since abated, rising 0.9% YOY as of November 2023, according to the US Bureau of Labor Statistics.⁹ As the market normalizes, growth from price increases has moderated and metal manufacturers are expected to shift their focus to backlog and volume growth. Industrial backlogs, in conjunction with anticipated infrastructure spending, will likely provide significant tailwinds heading into 2024. Buyers are expected to capitalize on these trends, investing in higher-return businesses and setting the foundation for an active M&A market.

To discuss the dynamic industrial fundamentals affecting OEMs, provide an update on your business, or learn about Capstone's wide range of advisory services and Precision Manufacturing market knowledge, please contact us.

Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.

Endnotes

1. St. Louis Fed, “Manufacturers' New Orders: Ferrous Metal Foundries [A31CNO],” https://fred.stlouisfed.org/series/A31CNO, accessed January 4, 2024.

2. St. Louis Fed, “Manufacturers' New Orders: Fabricated Metal Products [A32SNO],” https://fred.stlouisfed.org/series/A32SNO, accessed January 4, 2024.

3. St. Louis Fed, “Manufacturers’ New Orders: Total Manufacturing,” https://fred.stlouisfed.org/series/AMTMNO, accessed December 5, 2023.

4. St. Louis Fed, “Manufacturers Inventories,” https://fred.stlouisfed.org/series/MNFCTRIMSA, accessed December 5, 2023.

5. Seeking Alpha, “Sanmina Corporation (SANM) Q4 2023 Earnings Call Transcript,” https://seekingalpha.com/article/4648203-sanmina-corporation-sanm-q4-2023-earnings-call-transcript, accessed December 5, 2023.

6. Yahoo Finance, “Techprecision Signs Definitive Agreement to Acquire Votaw Precision Technologies,” https://finance.yahoo.com/news/techprecision-signs-definitive-agreement-acquire-210500537.html, accessed December 4, 2023.

7. Gulf Construction, “Dubal unit buys Thermalex to boost North America operations,” https://gulfconstructiononline.com/ArticleTA/415301/Dubal-unit-buys-Thermalex-to-boost-North-America-operations, accessed December 4, 2023.

8. Ametek, “AMETEK Announces Agreement to Acquire Paragon Medical,” https://www.ametek.com/newsroom/news/investor/2023/october/ametek-announces-agreement-to-acquire-paragon-medical, accessed December 4, 2023.

9. U.S. Bureau of Labor Statistics, “PPI Commodity Data,” https://data.bls.gov/timeseries/WPUFD4&output_view=pct_12mths, accessed January 2, 2024.