Large construction companies have diversified revenue streams, including construction engineering services and the construction. Despite the diverse revenue stream, the construction industry is historically susceptible to cyclicality.

Low Construction Industry Valuation Multiples

Construction companies tend to have low valuation multiples for the following reasons:

• As mentioned, the industry is highly cyclical, tied closely to economic cycles and infrastructure spending. In downturns, demand for construction plummets. This reduces investor confidence and the lower valuation multiples reflect this risk.
• Due to the nature of the business being contract and project based, the revenue can be inconsistent and subject to delays. This revenue volatility also results in lower valuation of construction companies compared to other industries like tech.
• Construction often requires heavy investment in machinery, equipment, and infrastructure. This reduces free cash flow (a key driver for higher multiples).
• The industry operates on low profit margins, which decreases net income and subsequently lowers P/E ratios.
• Risks like cost overruns, delays, labor shortages, or disputes with clients reduce the attractiveness of the sector.
• The industry is fragmented, with many small players bidding for the same contracts. This intense competition drives prices down, reducing profitability and valuation attractiveness.

As a result, the median revenue multiple of 60 construction companies listed on major US exchanges is 1.1x.

EBITDA Multiples for Construction Companies

Out of 48 construction companies, the median EBITDA multiple is 9.8x.

In the dataset, there are more companies with revenues above $1 billion. Companies with revenue under $200 million have higher average EBITDA multiple.

The median PE ratio for construction companies is 16.6x.

Construction Industry Margins

Construction industry margins are on the low end across industries.

The median gross margin for construction companies is 21%, which is very narrow gross margin compared to some other industries.

The median EBITDA margin is 11%, and the median net profit margin is 8%.

There isn’t a clear difference across varying company size when it comes to average margins from $200 million in revenue and above. But it appears private, smaller construction companies with revenue below $200 million may experience lower gross margins.

Margins for construction companies are low perhaps due to the following factors:

• The industry is highly competitive, resulting in pricing pressures and thus lower margins.
• Fixed and operating costs are relatively high for the industry.
• There may be unforeseen cost overruns on projects with materials, labor, or delays.
• Construction is labor-intensive and is heavily dependent on skilled and unskilled labor, which is costly and subject to wage inflation, strikes, or shortages.
• High inflation can have a significant factor on materials cost.
• High interest rates can increase the borrowing project financing cost.

Refresher: Value a company using EBITDA.

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