Shareholders of Target Hospitality would probably like to forget the past six months even happened. The stock dropped 41.6% and now trades at $5.60. This may have investors wondering how to approach the situation.
Given the weaker price action, is now a good time to buy TH? 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 Positive Attributes:
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 shrunk over the last 12 months, but it still averaged 38.6% over the last two years, elite for a consumer discretionary business. This shows it’s an well-run company with an efficient cost structure.
2. New Investments Bear Fruit as ROIC Jumps
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Over the last few years, Target Hospitality’s ROIC has increased significantly. 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:
Weak Growth in Utilized Beds Points to Soft 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 13,138 in the latest quarter, and over the last two years, averaged 9.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
Final Judgment
. After the recent drawdown, the stock trades at 3.5× forward EV-to-EBITDA (or $5.60 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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