By: Mary Ellen Biery
Source: Forbes

The grass is greener on this side of the recession for privately held companies in the lawn and landscaping business, according to new data from Sageworks Inc., a financial information company.

Companies in the landscaping services industry (NAICS code 56173), on average, saw sales growth of about 10 percent in 2011, rebounding from a decline in 2009 and from about 5 percent growth in 2010, Sageworks’ financial statement analysis of private companies found.

Experts say improvement in some housing markets across the U.S., along with pent-up demand from homeowners who’ve decided to stay put for now, are helping many landscaping services companies generate higher sales and improved profitability. Average net profit margin for the private companies in Sageworks’ database has improved almost three percentage points since a 10-year low in 2009.

Private landscaping services companies generated a net profit margin of nearly 7 percent in 2011, compared with closer to 4 percent in 2009, Sageworks’ data shows. Net profit margins are adjusted to exclude taxes and owner-compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance.

“You have these pockets nationally where the economy’s been good, and there’s some pent-up demand where consumers held off on their big-ticket purchases,” said Charles R. Hall, professor and holder of the Ellison International Chair in International Floriculture at Texas A&M University, in a telephone interview. “We’re seeing that pent-up demand break loose.”

On the residential side of landscaping services, contractors are doing a little better in those areas where housing is doing a little better, said Hall, who is also an economist for the American Nursery and Landscape Association.

Economists with Wells Fargo Corp. (NYSE:WFC) expect new home sales to increase 12 percent in 2012 and rise nearly twice as fast in 2013, according to a recent housing market report by the firm. Inventories of new homes are at all-time lows, which should produce sizeable gains in single-family starts, and apartment construction should also increase more significantly this year, Wells Fargo said.

Robb Granado, an analyst with Sageworks, said housing turnover or new residential developments can boost landscaping services sales. But another reason behind the improved business conditions could be tied to homeowners having a “love-the-one-you’re-with” mentality. “People may be saying, ‘I really want to sell my house, but the market is so bad I’m going to be happy with the place I’ve got, and it’s time to make it better,’” Granado said.

On the commercial side, many apartment complexes and commercial office buildings continued maintenance landscaping throughout the recession, Hall said. But now, he said, “it’s the design-and-build installation that’s starting to build some momentum.”

Business failures may have helped industry pricing power in recent years, but landscaping services is highly competitive, so it’s likely that most landscapers are also operating leanly – doing more with fewer workers, Granado said.

Mike McDaniel runs a two-man landscaping service, McDaniel’s Lawn Care & Landscaping, in Jacksonville, Fla., and he said in a telephone interview that he’s seen some improvement in business recently that is more than seasonal. “It’s hard for me to tell, but it looks like it’s getting a little better,” he said.

McDaniel lost some customers from 2006 into 2008, especially customers who were small business owners themselves. He credits an effective company website and good cost management for keeping his business operating well. Gas prices have increased since last year, but they haven’t affected McDaniel’s bottom line too much, because he tailors his work schedule to minimize driving.

Business isn’t so great yet that McDaniel is ready to add workers.

But Hall said that some companies are starting to hire again, particularly in positions tied to sales and management. And merger-and-acquisition activity is heating up – another positive sign that some companies are planning to grow, he added. “The cheapest way to grow is through acquisition.”

Sageworks, a financial information company, collects and analyzes data on the performance of privately held companies and provides financial forecasting software.