TH - Outlook Improving For Target Hospitality Corp.

Summary

• This largest supplier of modular mobile housing with amenities serves business travelers, on-site workforces, the homeless, and migrants with increasing focus and reliance for growth on government contracts.
• After consecutive quarters of positive earnings, it appears another is on the way. Another increase last quarter and forecasts sparked a jump in share price; there might be more to come.
• We are of the opinion the stock will outperform despite an oversize persistent short interest rate of 23%.

Investor Outlook

March 9, 2023, is the next earnings announcement date from Target Hospitality Corp ( TH ). We will learn if the company has maintained its seventh consecutive quarter of positive earnings and year-over-year revenue growth.

The staggering 23% short interest rate is a wrinkle to keep in mind. If the March report is positive, the shares can potentially climb another ~30% or 40% over the next 12 months to +$20.

Shares traded around $9.85 during most of the first 18 months after the company went public. The price dived under $2 in the throes of the pandemic. Its price popped in July '22 following management's forecast for a 53% rise in revenue to a projected record annual $505M. In January '23, the 52-week high was $18.48. The price slipped in mid-February '23 to ~$14.66. It has a low Beta of 0.65 and a 15.25 price-to-earnings ratio. The shares are up ~400% in the last 12 months.

The numbers, the reasonable PE, and the recent upgrade to Strong Buy per the Seeking Alpha Quant Rating, in our judgment, combine to suggest Target Hospitality stock will outperform. Target Hospitality will get traction from the U. S. economic recovery; it is among the strongest of the G-7 nations . A new report from McKinsey & Company expects better-than-expected economic growth and "a rebound in 2024." That bodes well for business travel, temporary workers' housing needs, and other products and services Target offers. Then there are demands on federal, state, and local governments to supply cheap but humane housing for homeless Americans and the flood of migrants. This sector is a top priority target for the company.

The Company

Samuel Clemens cautioned names are not always what they seem, nor are corporate sector and industry classifications. Financial analysts classify the company in the Consumer Discretionary sector and the Hotels-Resorts-Cruise Lines industry. But the company is not primarily a provider of tourist delectations for vacationers.

Since 1978, Texas-based Target Hospitality grew into the nation's largest rental and hospitality company providing alternative modular, mobile, relatively low-cost housing and amenities. It rents 16,000 rooms primarily for employees and guests of Fortune 500 companies, governments, and NGOs. Its culinary and catering services, concierge, laundry, recreational facilities, transportation, and security accouterments define its hospitality mission to sidestep any misnomer. The company also designs, builds, operates, maintains, owns, or delivers turnkey housing for on-site workforces, whether temporary or permanent structures.

Three target markets of the company are business travelers, on-site workforces, the homeless, and migrants. Lodging consumes 34% of business travel expenses. Business travelers take 1.3M trips every day. The average trip lasts for three days. Since 2020, the number of business trips is on a steady incline. We believe companies honing expenses while offering comfortable stays for their employees will advance Target's revenue and earnings growth. Travel spending in the last few years was cut back 50%, a blow to the economy. We expect business travel spending to top $800B by 2027, up from $694B in 2020.

Target Hospitality's construction and operations segment generated revenue of $291.3M and $119M in EBITDA in 2021. Besides temporary workforce housing for workers, like workers in search and drilling for gas and oil, the company owns and operates residential centers with thousands of beds for detained youths and migrants awaiting the disposition of their cases by government agencies.

The third target market is government housing contracts. In October '22, the company reported Target Hospitality signed a government contract for modular housing and services, raising the EBITDA to +$330M. There are risks accompanying increasing reliance on government contracts; they are fraught by political whim, public appearance, and budgets. Risks of non-renewal can affect the share price and investor confidence. According to the CEO , the company's Q3 '22 government segment revenue amounted to +77% of Q3 revenue and "is expected to represent over 70% of full-year 2022 revenue."

Government contracts have been uplifting the company's balance sheet and cash flow:

Focus on Debt and Ownership

Briefly, last November 9th, the company reported Q3 '22 GAAP earnings per share of $0.20. It had $0.03 EPS in Q3 '21. We forecast an EPS near $0.40 in Q4 '22. It is likely to report, in our opinion, ~$1.00 EPS for the full FY '22. Revenue in Q3 '22 was up almost 80% Y/Y with record cash and cash flow generated from operations during all 3 quarters. S A gives Target high marks in all but one category:

Target's debt-to-equity ratio is high, at 2.29 as of the end of last year. It is lower than at the end of 2021. Total debt was $335M, but lower after considering it was holding $177M in cash and equivalents. Long-term debt has remained fairly steady over the last five years. The debt issue is obviously high on the agenda. The CEO opened his remarks about Q3 results in the S A transcript, pointing out a reduction of +$220M of cumulative debt since FY '20. Return on equity is a healthy 37.8%.

Hedge fund ownership reached a high point in January '21 and May through September '22. Managers sold 51K shares last quarter when the share price moved into the $14 range. Corporate insiders likewise sold shares this last quarter. Insiders own 3.7% of the shares, funds and investment firms own ~65%, and institutions own 30%.

Closing the Door

We expect less income comes from oil and gas development and drilling sites over the next few years; leases are on hold and demand needs time to ramp up. Management refocused to secure government contracts for modular, mobile, inexpensive housing facilities for America's 600K homeless and millions of migrants. It is unfortunately a growing market that will generate positive revenue and earnings growth for the company. Some investors, however, are not sure and sold short 6.67M shares. Meanwhile, the share price is inching closer to its high and has the potential for moving higher into the low $20s.

The company also has significant market power; it has more market share than competitors in its industry. While businesses are back to spending on travel, government spending on housing for the homeless and migrants is skyrocketing . Bad news for Americans is good news for investors in Target Hospitality.

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