Target Hospitality has been on fire lately. In the past six months alone, the company’s stock price has rocketed 90.7%, reaching $14.73 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Target Hospitality, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Target Hospitality Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons there are better opportunities than TH and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Target Hospitality grew its sales at a weak 7.3% compounded annual growth rate. This was below our standard for the consumer discretionary sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Target Hospitality’s earnings losses deepened over the last five years as its EPS dropped 3.7% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, Target Hospitality’s low margin of safety could leave its stock price susceptible to large downswings.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Target Hospitality’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Target Hospitality, we’ll be cheering from the sidelines. After the recent rally, the stock trades at 20.1× forward EV-to-EBITDA (or $14.73 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our top software and edge computing picks.
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