Target Hospitality (TH): A Deep Dive into Its Valuation Status
Target Hospitality Corp (NASDAQ:TH) recently reported a daily gain of 4.74% and a 3-month gain of 2.66%. The company's Earnings Per Share (EPS) stand at 1.33. Given these figures, the question arises: Is the stock significantly overvalued? This article provides a comprehensive valuation analysis to answer this question. We encourage you to read on for a deeper understanding of Target Hospitality's intrinsic value.
Company Overview
Target Hospitality Corp is a leading specialty rental and hospitality services company in the United States. The company offers a range of services, including catering food services, maintenance, housekeeping, and more. Its primary revenue source is from customers with Government contracts located in Texas. The company's current stock price is $14.48, while its fair value (GF Value) is estimated to be $10.03. This discrepancy suggests that the stock might be significantly overvalued.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. If a stock price is significantly above the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Applying this analysis to Target Hospitality (NASDAQ:TH), it appears that the stock is significantly overvalued. The stock's current price of $14.48 per share is noticeably higher than its GF Value. Consequently, the long-term return of its stock is likely to be much lower than its future business growth.
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Evaluating Financial Strength
Investing in companies with low financial strength could lead to permanent capital loss. Therefore, it's essential to review a company's financial strength before investing. Target Hospitality's cash-to-debt ratio is 0.3, which is lower than 69.11% of 1049 companies in the Business Services industry. This ratio suggests a fair balance sheet, earning the company a financial strength rank of 6 out of 10.
Profitability and Growth
Profitable companies, particularly those with consistent profitability over the long term, are generally less risky investments. Target Hospitality has been profitable 4 times over the past 10 years. With an operating margin of 41.57%, the company ranks better than 97.43% of its industry peers. Its profitability rank stands at 6 out of 10, indicating fair profitability.
Growth is a crucial factor in a company's valuation. Companies that grow faster create more value for shareholders, especially if that growth is profitable. Target Hospitality has an average annual revenue growth of 13.9%, outperforming 75.51% of 984 companies in the Business Services industry. Its 3-year average EBITDA growth is 21.7%, which is better than 69.24% of firms in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is another way to assess its 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 finance its assets. When ROIC is higher than WACC, it implies the company is creating value for shareholders. Over the past 12 months, Target Hospitality's ROIC was 26.25, and its WACC was 20.06.
Conclusion
In conclusion, the stock of Target Hospitality appears to be significantly overvalued. The company's financial condition is fair, and its profitability is also fair. Its growth ranks better than 69.24% of 855 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.
