Strategic Acquisitions And Market Expansion Set To Propel Future Growth

Key Takeaways

• Construction Partners' strategic acquisitions and strong organic growth indicate potential for continued expansion and revenue increase.
  
• Favorable economic conditions and a focus on operational excellence are expected to improve net margins and sustain growth into fiscal 2025.
  
• Reliance on public funding, acquisition risks, industry competition, weather disruptions, and financial leverage present multifaceted challenges for future earnings and market share growth.

Catalysts

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

• Construction Partners has demonstrated strong organic growth, with a 13% increase this quarter and 9.3% year-to-date, indicating potential for continued revenue growth through expanded market share and entry into new markets.
  
• The company's strategic acquisitions, such as Hudson Paving and Robinson Paving, are expected to fuel future organic growth and contribute to achieving annual revenue growth goals, potentially impacting revenue positively.
  
• A stable economic environment and high demand for construction projects, supported by robust funding programs at state, local, and federal levels, suggest a favorable outlook for revenue growth from infrastructure projects.
  
• Construction Partners' focus on operational excellence and workforce development hints at potential improvements in net margins through increased productivity and efficiency.
  
• The raised fiscal 2024 outlook and record backlog provide visibility for sustained growth into fiscal 2025, suggesting the company has the momentum to possibly increase earnings and revenue further.

Assumptions

• Analysts are assuming Construction Partners's revenue will grow by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $132.3 million (and earnings per share of $2.42) by about October 2027, up from $70.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.6x on those 2027 earnings, down from 55.3x today. This future PE is lower than the current PE for the US Construction industry at 34.9x.
• Analysts expect the number of shares outstanding to grow by 1.21% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.94%, as per the Simply Wall St company report.

Risks

• The reliance on public project funding and the potential variability of such funding programs at the state, local, and federal levels could impact future revenue streams.
  
• Acquisitions as a major growth strategy carry integration and execution risks, which could affect net margins if the acquired entities do not perform as expected or integration costs exceed forecasts.
  
• The construction industry is inherently competitive, and an increase in competition for both public and private contracts could pressure earnings if Construction Partners cannot maintain or grow its market share.
  
• Weather-related disruptions, mentioned in the context of the fiscal fourth quarter, indicate operational risks that can affect project timelines and costs, potentially impacting revenue and margins.
  
• Leverage and financial policy, with a ratio of debt to trailing 12 months EBITDA discussed, suggest a risk of financial inflexibility, which could affect the company’s ability to invest in growth opportunities or impact earnings negatively during economic downturns.

Valuation

• The analysts have a consensus price target of $67.4 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 $74.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.5 billion, earnings will come to $132.3 million, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 6.9%.
• Given the current share price of $73.9, the analyst's price target of $67.4 is 9.6% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.