Unveiling Construction Partners (ROAD)'s Value: Is It Really Priced Right? A Comprehensive Guide
Construction Partners Inc (NASDAQ:ROAD) has recently experienced a daily gain of 4.48%, and a 3-month gain of 18.5%. The company's Earnings Per Share (EPS) (EPS) stands at 0.59. But, does this performance make the stock fairly valued? This article aims to answer this question by conducting a comprehensive valuation analysis of Construction Partners. Stay with us as we delve deeper into the company's financials, growth prospects, and intrinsic value.
Company Introduction
Construction Partners Inc operates as an infrastructure and road construction company, providing construction products and services to public and private sectors. Its services encompass the construction of highways, roads, bridges, airports, as well as commercial and residential sites. The company also offers site development, paving, utility and drainage systems, and supplies hot mix asphalt.
As of October 04, 2023, Construction Partners (NASDAQ:ROAD) trades at $37.55 per share, with a market cap of $2 billion. The company's GF Value, an estimate of its fair value, is $39.67, indicating that the stock is fairly valued. This valuation is based on the company's historical trading multiples, past performance and growth, and future business performance estimates.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on three factors: historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally trade at.
If the stock price is significantly above the GF Value Line, it is 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. At its current price of $37.55 per share, Construction Partners has a market cap of $2 billion, and is estimated to be fairly valued.
Because Construction Partners is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to carefully review the financial strength of a company before deciding to buy its stock. A good starting point for understanding the financial strength of a company is looking at the cash-to-debt ratio and interest coverage. Construction Partners has a cash-to-debt ratio of 0.13, which is worse than 83.2% of 1601 companies in the Construction industry. GuruFocus ranks the overall financial strength of Construction Partners at 6 out of 10, indicating that the financial strength of Construction Partners is fair.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Construction Partners has been profitable for 7 out of the past 10 years. Over the past twelve months, the company had a revenue of $1.50 billion and an Earnings Per Share (EPS) of $0.59. Its operating margin is 3.43%, which ranks worse than 58.89% of 1625 companies in the Construction industry. Overall, the profitability of Construction Partners is ranked 7 out of 10, indicating fair profitability.
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Construction Partners is 18%, which ranks better than 83.82% of 1551 companies in the Construction industry. The 3-year average EBITDA growth is 4.3%, which ranks worse than 50.08% of 1318 companies in the Construction industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Construction Partners's ROIC is 4.12, and its cost of capital is 8.66.
Conclusion
In conclusion, the stock of Construction Partners is estimated to be fairly valued. The company's financial condition and profitability are fair. Its growth ranks worse than 50.08% of 1318 companies in the Construction industry. To learn more about Construction Partners stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
