Target Hospitality (TH): A Comprehensive Guide to Its Market Value
Target Hospitality Corp (NASDAQ:TH) recently experienced a daily loss of 3.61% and a 3-month loss of 3.45%. Its Earnings Per Share (EPS) stands at 1.33. The question we aim to answer is, "Is the stock significantly overvalued?"
Our valuation analysis will delve into the intrinsic worth of Target Hospitality Corp (NASDAQ:TH) and its current market position. We encourage you to read along to gain a deeper understanding of the company's financial standing.
A Snapshot of Target Hospitality Corp (NASDAQ:TH)
Target Hospitality is a vertically integrated specialty rental and hospitality services company in the United States. The company provides a range of services including catering, maintenance, housekeeping, and more. Its major revenue comes from the Government segment which consists primarily of specialty rental and hospitality services revenue from customers with Government contracts located in Texas.
Currently, Target Hospitality's stock price stands at $14.56, while its GF Value, an estimation of fair value, is $10.06. This discrepancy paves the way for a deeper analysis of the company's value.
Unveiling the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is calculated based on historical multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the fair value at which the stock should ideally be traded.
According to our valuation method, Target Hospitality (NASDAQ:TH) is estimated to be significantly overvalued. The stock's current price of $14.56 per share significantly surpasses the GF Value Line, indicating that the stock may be overvalued and might deliver poor future returns. Conversely, if the stock's share price was significantly below the GF Value Line, the stock might be undervalued and could deliver high future returns.
Target Hospitality has a market cap of $1.50 billion, and because it is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Financial Strength of Target Hospitality
Investing in companies with strong financial strength reduces the risk of permanent loss. A great way to understand a company's financial strength is by looking at its cash-to-debt ratio and interest coverage. Target Hospitality has a cash-to-debt ratio of 0.3, ranking worse than 69.21% of 1049 companies in the Business Services industry. Its overall financial strength is 6 out of 10, indicating fair financial health.
Profitability and Growth of Target Hospitality
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. Target Hospitality has been profitable 4 times over the past 10 years. With a revenue of $603.50 million over the past twelve months and an Earnings Per Share (EPS) of $1.33, its operating margin is 41.57%, ranking better than 97.32% of 1043 companies in the Business Services industry. Overall, the profitability of Target Hospitality is ranked 6 out of 10, indicating fair profitability.
Growth is a crucial factor in a company's valuation. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Target Hospitality is 13.9%, which ranks better than 75.48% of 983 companies in the Business Services industry. The 3-year average EBITDA growth rate is 21.7%, ranking better than 69.09% of 854 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate a company's profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If ROIC exceeds WACC, the company is likely creating value for its shareholders. During the past 12 months, Target Hospitality's ROIC was 26.25 while its WACC came in at 20.3.
Conclusion
In conclusion, the stock of Target Hospitality is estimated to be significantly overvalued. The company's financial condition is fair, and its profitability is also fair. Its growth ranks better than 69.09% of 854 companies in the Business Services industry. To learn more about Target Hospitality stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
