2024 Distribution Update and 2025 Industry Outlook (Baird)

Summary

• Building Products distributors returned 237.0% over the last five years versus 121.3% for the S&P 500.p.8
• Domestic manufacturing construction spending has surged more than 200% compared to pre-COVID levels, and the U.S. has added back over 1 million jobs since 2020.p.4
• Weaker industrial production remains the major obstacle for distributors, with PMI in contraction since October 2022.p.4
• The median TEV / NTM EBITDA multiple of the distributor group has a long-term average of 9.0x.p.11
• Baird has closed 37 distribution M&A transactions since 2021 and 85 since 2010.p.26
• Baird's Quarterly Distribution Survey polls ~500 private companies with ~$100 billion in aggregate annual revenue.p.29

Key insights

1. Distributors are expected to pass tariff-related price increases to customers to maintain gross margin percentage, although repricing lags could be a near-term challenge.p.4
2. Industrial pent-up demand, expectations of further rate cuts and post-election stability are fueling confidence that the industrial environment will improve throughout 2025.p.4
3. Nearshoring and reshoring are expected to create substantial incremental demand for distributors over the mid- to longer-term.p.4
4. Larger providers are expected to keep taking share as customers consolidate spend.p.5
5. Healthcare distribution stocks returned 219.5% over five years, ahead of the S&P 500 at 121.3%.p.8
6. Electrical Products distribution stocks returned 97.7% over five years, trailing the S&P 500 at 121.3%.p.8
7. Distributor valuation multiples have contracted following record levels in 2020 and 2021 but remain in line with long-term historical averages.p.11