TH - Target Hospitality: Continued Revenue Growth And Long-Term Debt Reduction Encouraging

2023-08-16 14:44:34 ET

Summary

• Target Hospitality has seen strong revenue growth based on continued growth in demand for humanitarian housing solutions.
• The company has significantly reduced its total long-term debt load since last December.
• I take a bullish view on Target Hospitality.

Investment Thesis: I take a bullish view on Target Hospitality, based on continued revenue growth and long-term debt reduction.

In a previous article back in March, I made the argument that Target Hospitality ( TH ) could see further upside going forward, on the basis of strong revenue growth and impressive balance sheet metrics.

However, the stock has since descended to a price of $14.34 at the time of writing:

The purpose of this article is to assess whether Target Hospitality has the ability to see a rebound in growth from here, taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Target Hospitality, we can see that diluted income per share is up substantially on that of the same quarter last year, while revenue and utilization have also seen growth:

From a balance sheet standpoint, we can see that Target Hospitality has eliminated its non-current long-term debt, while the current portion of its long-term debt is significantly lower than that of the non-current portion last year.

Once again, the government segment accounted for the majority of revenue in Q2 - with over 70% of revenue originating from this segment:

The Government segment saw a particular increase in revenue from that of last year as a result of the Expanded PCC Community - from $74.9 million in Q2 2022 to $101.2 million in Q2 2023.

When looking at revenue by quarter across the Government segment from a longer-term perspective - we can see that 2022 saw a strong jump in revenue as a result of the Expanded Humanitarian Contract which started on May 16, 2022 - which brought in an estimated initial minimum annual revenue contribution of $390 million.

More recently, Target Hospitality has taken steps to secure a long-term contract for the PCC (Pecos Children's Center) community through establishing a contract vehicle in March used by the U.S. government to facilitate multi-year contract awards, and more recently the government released a statement of work in May detailing the performance of work associated with this contract.

My Perspective

As we have seen, Target Hospitality remains highly dependent on revenue from the Expanded Humanitarian Community initiative to continue driving growth.

In this regard, this will be an important factor for Target Hospitality going forward. In my view, the demand for humanitarian housing solutions is set to increase further in the current climate - and Target Hospitality's decision to expand its assets in this segment is a prudent move.

As a result of the inflationary pressures that the broader economy has been facing over the past year coupled with labor shortages, there has been some evidence that increased humanitarian migration helped to alleviate upward pressure on prices and alleviated the shortage of workers following the pandemic.

To alleviate the impact of labor shortages in the future - demand for humanitarian services could see a further increase going forward - and Target Hospitality is in a good position to meet the demands of this growing market given its growing acquisition of strategic humanitarian assets.

From an earnings standpoint, we can see that Target Hospitality has continued to see a reduction in its P/E ratio while earnings per share (on a normalized diluted basis) has continued to see growth.

Taking these factors into consideration, I do not see a justification for the fall in stock price that we have seen over the past few months and the stock has significant scope to rebound to prior levels - with the prior high of $18 as seen last January being achievable if earnings growth continues through to the next quarter.

Risks

In terms of the potential risks to Target Hospitality at this time, I do not have any particular concerns with respect to revenue growth - as we have seen that the company has managed to see growth across its business segments remain resilient in this regard.

That said, while Target Hospitality has managed to reduce its overall long-term debt levels in the past year - the company still has a current portion that still needs to be paid off over the next twelve months. This might be a reason why investors have been somewhat cautious of the stock (as evidenced by the price drop) and may be waiting to see if Target Hospitality has the capacity to service this debt over the next year.

Should this not prove to be the case, then we may see apprehension continue on the part of investors. However, I take the view that the company has the capacity to do so, based on both revenue growth over the past year as well as the degree to which Target Hospitality has reduced its debt load already (total long-term debt in December 2022 stood at $328 million).

Conclusion

To conclude, Target Hospitality has continued to see strong performance across the Government segment - which accounts for the majority of the company's revenue. Additionally, the company has shown a significant reduction in its overall long-term debt load over the past six months.

Taking these factors into consideration, I take a bullish view on Target Hospitality.

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