Giant Contractors Shore Up Slipping Confidence

By Larry Stewart, Executive Editor | September 28, 2010
2007 Construction Equipment Giants
A launching truss lifts a 94-foot-long, 70-ton precast-concrete girder into place during Washington Group International's construction of the New River Bridge for light rail in South Florida.

2007 Construction Equipment Giants
These are just a few of the silos Kiewit Southern located on site to supply paving Atlanta's Hartsfield International Airport runway addition.

2007 Construction Equipment Giants
Tunnel boring machines open twin 1.7-mile tunnels to extend the Eastside Gold Line Light Rail System in Los Angeles. Joint venture, LRT Constructors a Washington Group, was awarded the contract to design and construct the six-mile extension.

2007 Construction Equipment Giants
Lane Construction mills concrete lanes at night in reconstructing I40.

Our industry continues to recover from the recession of 2003, but some Giants — firms that own more than $25 million worth of equipment — can no longer overlook the weak housing market. Despite the nonresidential construction boom — despite 68 percent of Giants realizing work-volume growth in 2006 (10 percent more than forecast) — Giants' 2007 forecasts in May suggest that the country's largest fleet owners are expecting the other shoe to drop.

Good times continue to roll for businesses in the primary Giant vocation, construction contractors, but they do expect some moderation of what has been a torrid growth rate. Construction Equipment's Giants list excludes home builders, so it is dominated by firms riding the nonresidential construction wave. In 2005, 74 percent of Giant contractors reported increasing work volume. Not expecting a good thing to last, nearly 30 percent of contractor Giants forecast work volume to flatten out in 2006. Twelve percent expected volume to decline. But in this year's survey, a startling 82 percent of contractors reported increased 2006 work volume. Nevertheless, the percentage forecasting work-volume growth for 2007 dropped to 52. Thirty-two percent of Giant contractors expect work volume to level off this year.

Giant contractors have enough work backlogged to sustain their volume far into 2008, or later. Almost half of contractors responding to the Giants survey will rate 2007 as a very good or excellent business year. It's a level of enthusiasm we haven't seen since the late 1990s. As is often the case when firms expect to do good business while volume growth is slowing, there are steep drops in percentages of Giant contractors expecting to increase spending on new equipment and equipment rentals. It should be pointed out, though, that overly ambitious budget watchers expect to reduce these two large line items every year regardless of economic conditions.

The housing slowdown has had a greater impact on Giant materials producers, andthey are more stoic about 2007's business prospects.

The percentage of Giant materials firms forecasting increased work volume in 2007 fell by nearly half, compared to the 2006 forecast. The jolt, when 20 percent of materials Giants who were expecting volume increases in2006 saw work level off instead, is probably responsible for the moderation. Twenty-four percent of materials firms expect 2007 volume to decline.

Work volume and business quality are more closely related for materials Giants than for contractors. Only 24 percent of materials firms forecast a very good or excellent business year — down by more than half from 2006. Percentages expecting to spend more on equipment reflect those declines almost perfectly.

The change in rental Giants' work-volume forecasts closely resembles that of materials firms, but rental companies' volume is coming down from a higher level and their expectations for business quality this year are stronger. Nearly half of all rental Giants anticipate business this year to be very good or excellent.

Rental Giants' exuberance is not surprising, given gradually rising rental rates and equipment users continuing to include rented equipment in their fleet-management strategies. Giant rental companies enjoy a double portion of the growth of the rental alternative because large national and multi-regional rental firms are uniquely suited to serve Giant contractors. Giant contractors not only have large rental budgets, but they have been applying rental at a greater rate than firms with smaller fleets.

Sales and consolidation of equipment-owning firms — particularly rental and materials Giants — result from the past three years' prosperity. Firms that have been making money are looking for competitive advantages and tax shelters. Equity groups are looking for ways to grow using the produce of their portfolios.

Rental-company sales are the canary in this coal mine, heating up most visibly because of the nature of these unique beasts. A little wobbling of industry confidence has contractors looking for ways to reduce rental expenditures. Rental companies' softening business outlooks may have some owners who survived the early-decade recession thinking about selling out, but they don't outweigh the sustained rental-adoption trend. Certain investors, flush from the general economy's ascendancy, are attracted to the cash-producing power and growth potential of equipment-rental companies.

Cerberus Capital Management's $6.6-billion acquisition of the titan United Rentals is an example that's hard to overlook of rental's allure for investors. Other private-equity firms' purchases of Hertz, RSC, NES, and Neff declare the investment value of rental fleets. Together with United Rentals, this group includes five of the 10 largest rental companies in the United States.

Materials-producer consolidation continues apace, fueled by the rising value of Giant firms' aggregate reserves and market access. In the past 18 months, four Giants at the top of the materials-producer list have made strategic purchases, often involving other leading companies.

Vulcan Materials bought Florida Rock Industries for $4.6 billion, and the combined company will increase Vulcan's aggregate reserves more than 20 percent to about 13.9 billion tons.

CRH, the Irish parent company of OldCastle US, bought APAC in August of 2006 for $1.3 billion and disposed of contracting and asphalt production in Georgia, North and South Carolina, Texas and Virginia in six separate transactions that raised $215 million.

HeidelbergCement AG, German parent to LeHigh Cement, bought Hanson to add its rich aggregate reserves and precasting volume to LeHigh's cement-producing capacity.

LaFarge North America's acquisitions of three Chicago-area quarry operations raise its aggregate sales in Chicagoland to 11 million tons.

These companies bet billions of dollars on the long-term value of aggregate reserves even though the new housing market's slide is affecting their income directly and challenging the overall economy enough to reduce the Fed's GDP-growth predictions for 2007 by a quarter point. Federal Reserve Board Chairman Ben Bernanke predicts the materials firms won't have long to wait, though, before home building stops restricting their revenue growth.

"Overall, the U.S. economy appears likely to expand at a moderate pace over the second half of 2007, with growth then strengthening a bit in 2008 to a rate close to the economy's underlying trend," Bernanke told Congress in mid-July.

Bernanke predicted the pace of home sales would remain sluggish for a while, due largely to tightened lending standards and the late-June mortgage-rate increase. But he emphasized that home sales would ultimately rebound on the strength of income growth and still-attractive mortgage rates. Within a month, the Fed had cut its discount rate to banks to encourage the continued flow of smart loans.

"The pace of home sales seems likely to remain sluggish for a time, partly as a result of some tightening in lending standards and the recent increase in mortgage interest rates," he said. "Sales should ultimately be supported by growth in income and employment as well as by mortgage rates that — despite the recent increase — remain fairly low relative to historical norms."

See the List!

Our list of Giants with fleet-replacement values of $100 million or more can be found at: /giants-2007-listings

About CE Giants

The Construction Equipment Giants list represents as closely as possible all firms that own fleets with replacement values of $25 million or more. Equipment-replacement values are compiled by Construction Equipment magazine using information provided by the individual companies. When figures are not provided (identified with an asterisk), Construction Equipment estimated fleet value. If you feel your firm qualifies as a Giant, please write to Larry Stewart, Construction Equipment, at or phone 314-962-0639.

Top 10 Giant Contractors
Company Fleet-Replacement Value (millions) Overall Giants Rank
* Construction Equipment estimate
Source: Construction Equipment Giants list, 2007
Kiewit $2,100 9
Great Lakes Dredge & Dock $1,065* 22
Granite Construction $875 26
Elmo Greer & Sons $475 49
Las Vegas Paving $420 59
Weeks Marine $400 65
The Walsh Group $400 64
Bechtel $400 60
Clark Construction Group $400 61
T.J. Lambrecht Construction $348 69


Top 10 Materials Producers
Company Fleet-Replacement Value (millions) Overall Giants Rank
* Construction Equipment estimate
Source: Construction Equipment Giants list, 2007
Martin Marietta Aggregates $2,861 3
Lehigh Heidelberg Cement Group $2,850* 4
Lafarge North America $2,638* 5
Vulcan Materials $2,397* 7
Oldcastle Materials $2,005* 12
Cemex North America $1,675* 14
MDU Resources $1,200 18
Irving Materials (IMI) $700 30
Aggregate Industries $697* 31
Syar Industries $520 38



Top 10 Rental Fleets
Company Feet-Replacement Value (millions) Overall Giants Rank
* Construction Equipment estimate
Source: Construction Equipment Giants list, 2007
United Rentals $4,000 1
Sunbelt Rentals $2,200 8
Hertz Equipment Rental Corp. (HERC) $2,075* 11
RSC Equipment Rental $1,696* 13
NES Rentals $1,000 23
Maxim Crane Works $770 27
All Erection & Crane Rental $596* 33
Sunstate Equipment $550 35
Neff Rental $530 36
Finning International $522* 37



Top 10 Mining Fleets
Company Fleet-Replacement Value (millions) Overall Giants Rank
* Construction Equipment estimate
Source: Construction Equipment Giants list, 2007
Rio Tinto America $2,467* 6
CVRD Inco $2,093* 10
FCX $1,430* 15
Arch Coal $1,300 16
Drummond $1,100 19
BHP Billiton $1,085* 21
North American Coal $980* 24
Newmont Mining $900* 25
Peabody Energy $737* 28
Cleveland-Cliffs $561* 34