Industry Description
The machine shop services industry turns raw materials into specified shapes and sizes using tools such as lathes, milling machines, grinders and drill presses (NAICS 332710). Also included are plastic and composite materials fabricated through machining.
The following are some basic characteristics of the machine shop services industry:
- Machine shop services industry has a combined revenue of $40.8 billion, with a growth rate of 0.8% in 2016-2021
- There are approximately 17,000 businesses as of 2021
- The machine shop services industry employs approximately 262,000 people
Industry Trends
The industry is highly fragmented and has low levels of market share concentration, with the top three industry players comprising less than 1% of revenue in 2021. Small players are independently operated and owned in one or more states while the biggest players have multiple locations across the US. Some key external forces influencing this industry are (i) cost of expenditure (ii) automation and (iii) the COVID-19 pandemic. Each of these is described in further detail below.
The cost of expenditure has had negative implications on the profitability of the industry. While data from the industry indicates the industry has a promising revenue drive, the same cannot be said about profitability. This is seen in key statistics from 2016 to 2022 when the industry recorded $40.8 billion revenue, which represented 0.9% annual growth but only $1.3 billion profit within the same period, which was -11.1% annual growth. In the past five years, there has been a high cost of expenditure associated with the supply chain within the industry. Particularly, the high price of steel over the years has driven profits down, as a greater part of revenue generated goes back into costs for raw material.
There has been an increased investment in automation to significantly reduce the cost of operation. Automation allows the industry to now serve many different markets that were traditionally not served. An example of this is the medical equipment market segment, which in 2021 contributed to 3.1% share of revenue. Previously, the industry did not have the capacity for the medical market. Automation is therefore a key factor for the industry.
The COVID-19 pandemic has impacted the industry’s capacity and projection. The industry has seen both revenue growth and drops due to the pandemic. For example, while the airlines market generated an estimated 7.6% of revenue for the industry, this has fallen in recent times since people are not traveling much even after the pandemic. The medical market on the other hand has seen growth and has now generated 3.1% of industry revenue because of an increased demand for medical supplies due to the pandemic. This has greatly affected strategic planning in the industry with industry players investing more in areas where their profits can be better guaranteed.
Among the key factors that are currently impacting the industry are the cost of expenditure, automation and the COVID-19 pandemic. Overall, revenue generation has been promising but not all sectors of the industry can successfully translate these revenues into profits due to the cost of doing business. Automation, which has helped most companies cut down on the cost of doing business as well as having the capacity to service new markets, is a strategic response to the current industry. Going forward, the impact of pandemic will continue to be felt. Industry players will therefore need to position themselves well to minimize the negative impacts and maximize the positive ones of current industry trends.
Key Performance Metrics
In evaluating the machine shop services industry, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions.
- Customer order lead time
- Total inventory turns
- On-time completion rate
- Finished-product first-pass quality yield
- Machine availability
- Machining cycle time
Industry Organizations & Publications
The following organizations publish useful information:
- National Tooling & Machining Association
- Council of Manufacturing Associations
- National Association of Manufacturers
- Association For Manufacturing Technology
- American Machinist
- International Manufacturing Technology Show
Guideline Information: Private Purchase Transactions
Most machine shop services are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held machine shop services is generally the best source of information to appraise a subject company.
The following are typical appraisal multiples from sale of machine shop services:
- Revenue multiples between 0.3 and 1.4 times
- Gross Profit multiples between 0.7 and 2.9 times
- EBITDA multiples between 2.9 and 8.0 times
In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered.
Guideline Information: Publicly Traded Companies
Most machine shop services are privately owned; however, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.
The largest publicly traded US machine shop services are:
- Reliance Steel & Aluminum Co. (RS) – $14.2 billion market capitalization
- Jabil Inc. (JBL) – $11.2 billion market capitalization
- Standex International Corporation (SXI) – $1.4 billion market capitalization
- Proto Labs, Inc. (PRLB) – $821.3 million market capitalization
The Price-to-Earnings (P/E) ratios of these four companies range between 8.3 times and 20.3 times.
Appraisal Rules of Thumb
Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.
Machine shop services are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.