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Investors start cleaning up with disaster-recovery boom

  • Disaster recovery and property restoration is a growth industry and, with some predicting wilder weather in the future due to climate change, the horizon looks limitless.
  • About 74 percent of restoration companies experienced sales growth in 2016, with 28 percent citing weather as a primary growth factor, according to a Cleanfax survey.
  • Investors may find the disaster-recovery sector highly profitable but hard to break into unless they are franchisees, mostly because there are few publicly traded options.
Hurricane Irma seriously damaged 65 percent of all homes in the Florida Keys, said FEMA. Pictured, Marathon Key.
Hurricane Irma seriously damaged 65 percent of all homes in the Florida Keys, said FEMA. Pictured, Marathon Key.

The year hurricanes Katrina and Wilma devastated Florida and Louisiana, Bill Begal's property restoration and cleanup business took in more than $10 million in revenue. An average year, by comparison, could bring in up to $4 million — not bad for a company bootstrapped inside a family dry-cleaning store more than 20 years ago.

"Flooding is a big business," said Begal, owner of Begal Enterprises. So big that Begal accepted an acquisition offer for the Rockville, Maryland-based firm, which mitigates water, wind and fire damage, for a "fair" price earlier this year to a larger competitor.

The deal came a bit too soon to capitalize on restoration and rebuilding funds available after hurricanes Harvey, Irma and, now, Maria.

"Billions of dollars of insurance money and investment money will be flowing into the affected areas to clean up and rebuild," said Joseph Roseman, managing partner of financial advisory firm O'Dell, Winkfield, Roseman and Shipp.

"If you have the proper expertise and work ethic, this could be an opportunity to change your career trajectory in areas that are going to need help for many years to come."

Water damage, such as the kind caused by hurricanes, is a cash cow and a growing industry, with gross profit margins at 60 percent to 70 percent, according to Craig Kersemeier, vice chair of the Institute of Inspection, Cleaning and Restoration Certification and owner of second-generation restoration business K-tech Kleening in Weston, Wisconsin.

While Begal Enterprises maintained low overhead in its first few years in business, Begal netted about 40 percent to 50 percent profit. It's no surprise, then, that in a survey this year by Restoration and Remediation magazine, nearly half of restoration contractors said water-damage restoration was their primary business.

And while the bulk of work handled by most property restoration companies involves mitigating local incidents, such as burst pipes or fire damage, about a third of all such firms travel outside their service areas for large-scale disaster-recovery jobs, according to a survey this year by industry magazine Cleanfax.

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About 74 percent of restoration companies experienced sales growth in 2016, with 28 percent citing weather as a primary growth factor, according to the Cleanfax survey. More than one third of survey respondents expect to grow more than 10 percent in 2017. Companies that focus on the commercial sector may have a leg up on profits, since they benefit from business-interruption coverage on commercial insurance policies that allow customers to proceed with work immediately to get their doors open again, said Kersemeier at the IICRC and K-tech Kleening.

Investors may find the sector highly profitable but hard to break into unless they are franchisees, mostly because there are few publicly traded options.

ServiceMaster, a Fortune 1000 company that also owns Terminix, Merry Maids and American Home Shield, was trading at $46.81 on September 18, up from $40.41 a month ago and $37.68 at the start of the year. It has nearly doubled from three years ago, when it was trading at just under $24 a share. ServiceMaster locations are owned by franchisees.

Some of the biggest players are large private firms that are gobbling up smaller ones to create large national and worldwide networks better equipped to work with insurance companies' third-party administrators. Known as TPAs, they prefer to work with designated contractors who know their adjustment and claims processes, Kersemeier said.

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A few include Belfor, a privately held worldwide company with $1 billion in annual revenue, and Paul Davis Restoration, which has 370 independently owned and operated franchisees around North America. DKI is a disaster-recovery contracting company that calls on a network of smaller companies to mobilize when there's a big event.

But creative investors could potentially cash in on the property restoration and disaster-recovery sector's growth and profitability by looking at its supporting industries, said Roseman at OWRS.

"Granite [Construction] [GVA] and Fluor [FLR] are primary service providers to the U.S. government and had a big hand in the cleanup after Hurricane Sandy," he said. "Many midsize and small contractors will also benefit from contracts with these companies, and with FEMA directly."

Investors shouldn't discount transportation companies, such as Swift Transportation [SWFT], a trucking company that could be benefiting from the flow of goods to disaster areas, Roseman added.

"Sometimes we create our own problem. Everything will break. It's just a matter of when. It will create some opportunity for somebody." -Craig Kersemeier, vice chair of the IICRC and owner of K-Tech Kleening

Restoration equipment manufacturers, such as Phoenix Restoration Equipment and Dri-Eaz, dominate as much as 80 percent of the market, according to Kersemeier at the IICRC and K-tech Kleening.

Start-up EIR Healthcare fabricates modular temporary hospitals offsite and plans to market them for use in natural-disaster areas (similar modular structures were mobilized during Sandy, which struck the U.S. East Coast in 2012). It recently completed a $500,000 seed round and is talking with institutional investors for a series A funding round expected to close for $25 million. Selling for $250,000 per unit, the profit margin is described by EIR Healthcare CEO Grant Geiger as "high."

Neither the Restoration Industry Association nor the IICRC keep statistics on how many restoration and disaster-recovery businesses are out there, or how they are performing. But professionals watching the business don't believe it's getting any smaller or less profitable, despite growing competition and changing insurance claims standards.

"The business ... is not ever going away," said Kersemeier from his temporary work home in Florida. "In the United States, we've built on all the good land.

"Sometimes we create our own problem," he added. "Everything will break. It's just a matter of when. It will create some opportunity for somebody."

— By Kayleigh Kulp, special to CNBC.com

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