What a fantastic six months it’s been for Target Hospitality. Shares of the company have skyrocketed 65.4%, hitting $9.18. This performance may have investors wondering how to approach the situation.
Is now still a good time to buy TH? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Does Target Hospitality Spark Debate?
Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ: TH) is a provider of specialty workforce lodging accommodations and services.
Two Things to Like:
1. Operating Margin Reveals a Well-Run Organization
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Target Hospitality’s operating margin has been trending down over the last 12 months, but it still averaged 25.9% over the last two years, elite for a consumer discretionary business. This shows it’s an well-run company with an efficient cost structure, and we wouldn’t weigh the short-term trend too heavily.
2. New Investments Bear Fruit as ROIC Jumps
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. Target Hospitality’s ROIC has increased over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.
One Reason to be Careful:
Decline in Utilized Beds Points to Weak Demand
Revenue growth can be broken down into changes in price and volume (for companies like Target Hospitality, our preferred volume metric is utilized beds). While both are important, the latter is the most critical to analyze because prices have a ceiling.
Target Hospitality’s utilized beds came in at 7,482 in the latest quarter, and over the last two years, averaged 12.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Target Hospitality might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability. 
Final Judgment
Target Hospitality’s merits more than compensate for its flaws, and with the recent rally, the stock trades at 36× forward EV-to-EBITDA (or $9.18 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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