Expanding Footprint In Texas And Oklahoma Will Unlock Future Potential In The Sunbelt

Key Takeaways

• Strategic acquisitions in Texas and Oklahoma are expanding operations, aiming to boost revenue growth and efficiency through increased market share.
  
• Strong demand for infrastructure and strategic growth initiatives position the company for robust revenue streams and improved margins.
  
• Dependence on acquisitions and aggressive expansion poses integration and financial risks, potentially impacting profitability and margins amid inflation and market performance uncertainties.

Catalysts

A civil infrastructure company, constructs and maintains roadways in Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee, and Texas.

• Construction Partners is entering new markets with strategic acquisitions in Texas and Oklahoma, establishing a wider operational footprint that is expected to drive higher revenue growth from new opportunities in these expanding regions.
  
• The acquisition of additional hot mix asphalt plants and integration into existing platforms like Alabama's market is aimed at increasing market share and operational efficiency, potentially leading to improved net margins.
  
• Continued strong demand for infrastructure services in the Sunbelt, supported by substantial project backlog growth to $2.66 billion, indicates robust future revenue streams driven by state DOT funding and federal IIJA funds.
  
• The strategic growth model, emphasizing both acquisitions and organic growth, targets ongoing revenue expansion and margin enhancement, with organic growth already demonstrated at 11% this quarter.
  
• Stable-to-low inflation expectations and consistent passing of costs to customers are anticipated to maintain or improve adjusted EBITDA margins, which have already shown a significant increase from 10.3% to 12.3% compared to last year.

Construction Partners Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Construction Partners's revenue will grow by 23.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 6.8% in 3 years time.
• Analysts expect earnings to reach $253.9 million (and earnings per share of $4.6) by about March 2028, up from $56.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.0x on those 2028 earnings, down from 72.3x today. This future PE is greater than the current PE for the US Construction industry at 24.1x.
• Analysts expect the number of shares outstanding to grow by 5.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.95%, as per the Simply Wall St company report.

Construction Partners Future Earnings Per Share Growth

Risks

• The company's significant reliance on acquisitions for growth, with large-scale deals like Lone Star and others, could lead to challenges in integration, potentially impacting net margins and profitability if the acquisitions do not perform as expected.
  
• Record backlog and high bidding activity may increase pressure to maintain delivery standards, risking margin compression if the company is unable to efficiently manage its project pipeline.
  
• The rise in debt levels due to recent acquisitions could lead to increased financial risk, especially if interest rates rise or if there are any operational disruptions, potentially impacting net margins and earnings.
  
• Inflation and fluctuating energy costs, while currently stable, still pose a potential threat to input costs, which could adversely impact profitability if not managed carefully.
  
• The company's aggressive expansion into new states might dilute focus and resources from its traditional markets, potentially impacting revenue and margin growth if new markets do not perform as anticipated.

Valuation

• The analysts have a consensus price target of $104.0 for Construction Partners based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $95.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $253.9 million, and it would be trading on a PE ratio of 34.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of $72.4, the analyst price target of $104.0 is 30.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.