jakes47s/iStock via Getty Images
We are fast approaching the third anniversary (9/20/2019) of my original SA article related to Construction Partners (NASDAQ:ROAD). Over this three-year span, we have experienced the COVID-19 pandemic that basically brought much of the world to a standstill. Earlier this year we experience the stock market undertaking a massive correction, where luckily it has over recent weeks stabilized and moved upward, finally. For those who might have invested in Construction based on my original article, we have seen the stock over this period go from $16.21 to the current $30.00 level. If I’m allowed to say so — an increase of 86% return compared to the S&P 500 increasing by only 40% over the same period, I’m very pleased with my investment in Construction Partners. But with this article, I will update my thesis and outline why I think the stock has further to run in the near term and more assuredly in the long-term.
With this updated article I plan to enter it into the Seeking Alpha contest – Top Stock with a Catalyst. As all investors should know a catalyst for a particular stock can work both ways – creating a buying opportunity or creating a need to sell your position in the stock. With my update, my overwhelming position is that current catalysts are in a place where ownership of the stock is an opportune time for investors. However, since we are in a pivotal time with crosswinds and barriers on a worldwide basis impacting our economies, it is prudent to be aware of issues that can turn a buying opportunity into a need for selling. Therefore, after making my case for owning the stock I will devote some space to informing my readers of what they should be aware of as there are issues that could impact the valuation of the stock. And for that matter, it could impact the overall market. A general rule of investing is that deciding to buy a stock is easy. Deciding when to sell is the hardest part. Having a plan for when to sell should be a part of every investment decision.
Business Model Features:
Construction Partners’ business model is built around publicly funded projects for local and state roadways, interstate highways, airport runways, and bridges. In the private sector, its efforts are directed toward paving and site work services for office and industrial parks, shopping centers and local businesses, and residential subdivisions.
The company is concentrating its growth by focusing on five southeastern states: Alabama, Florida, Georgia, South Carolina, and North Carolina. As a region, the Southeast, including the populous states of Florida, Georgia, and North Carolina are the states contributing just over a fifth of the total United States gross domestic product (GDP).
Key Points:
Infrastructure and the upgrades expected in the markets where the company is concentrating its efforts are in a long-term upward trend for both the need and the funding to address the resulting problems. Population growth in Florida, Georgia, and North Carolina continues to attract growth from new residents moving into their states. Not only is it just population growth in the states, where they have operations but there is also major manufacturing construction taking place in these states. Both are key metrics that make the southeastern states a focal point of needing to upgrade their state and interstate highways. The company operates in a very diverse market area where one cancellation or project completion date will not skew the overall quarterly and yearly financial results. Plus, bad weather brought on by snow, sleet, and ice will not delay project work. However, the prospect of a hurricane being so destructive, though devastating for the area impacted, the recovery work will provide more project opportunities for the company.
Interim Events Since My Original 2019 Article:
In my initial article, I cited the fact that the company had 32 hot mix asphalt plants-HMAs, located within the area where they concentrate their work projects. With well-coordinated planning and understanding of the demographics of the marketplace they now own and operate 59 HMAs. One must consider that the major thrust of the company is bidding and winning the actual projects where they manage the construction work needed. However, they manufacture and store the major product needed to undertake the paving, whether on highways or building out a new subdivision for home construction -that being asphalt. The point is, by having the asphalt and having it readily available for other contractors they can generate revenue from projects where they aren’t the actual construction company overseeing the work. Considering that Construction Partners has grown their ownership of such HMAs by about 85%, they are building out a sustainable business model that allows them to buy the smaller “mom and pop” operations that become accretive to their ability to generate revenues and profits.
Construction Partners operates on a fiscal year ending in September, so they are currently in the final quarter of 2022 results. When I wrote my initial article in 2019, the company ended by generating revenues totaling $783,238,000.00. With their recent quarterly earnings report, management has increased their revenue projects in the range of $1.25 billion to $1.28 billion. By merely hitting the lower projection, this indicates an interim growth of approximately 60%.
Financial Highlights as of June 2022 3rd Quarter Results vs. YOY Comparison:
- Revenues: $380.27 Million vs. $261.66 Million in 2021=45% growth
- Gross Profit: $44.3 million vs. $36.8 million in 2021=21% Growth
- G&A Expense: $26.6 million vs. $23.2 million in 2021 (7.0% of Revenue vs. 8.9% in 2021
- Net Income: $12.2 million vs. $9.3 million in 2021=30% increase in
- Adjusted EBITDA: $37.6 million vs. $29.0 million=30% increase
- Project Backlog: $1.33 billion vs. $822.9 million in 2021=61% increase
What I’ve shared are what I consider the basics for the metrics needed for a company to be successful in generating revenue and profit growth. Before investing any investor should apply their own specific metrics based on their profile. Then the investor should do their due diligence on the merits of the company meeting their criteria. I’m not an expert on accounting principles and I certainly don’t know the investing profile for my readers. What I am advocating – use my article as a starting point and then do your homework – due diligence.
I would also like to add information that management shared in their recent quarterly comments where I think it addresses a critical issue for their stellar revenue and profit growth. Much of this quarterly report’s financial data was generated from contracts that were signed and committed to before the huge inflationary factors hit our economy. Therefore, many of the projects were being done when these inflationary factors hit. For example, just the price of fuel to operate the equipment we saw the price north of $5.00 a gallon. In their comments during the quarterly report, management mentioned that a large amount of these older contracts had been completed and now they are starting work on projects that factor in these previously unaccounted-for expenses. If most of the inflationary numbers have reached their peak and could be declining, this bodes well for maintaining growth in the gross profits for the company.
Catalyst For Future Success-The Good and the Bad:
The most obvious catalyst is the known federal approval for recent spending bills that include billions of dollars in grants for updating and building roads, bridges, and other related projects throughout the country. The $739 billion allocated in the Inflation Reduction Act–IRA, signed into law a week ago, is going to make a big impact on infrastructure projects. Certain parts of the IRA bill will not begin showing benefits for several years – the drug price reduction component being just one example. Therefore, what I want to see are the specific benefits being derived from key individual components of the federal funding, and how serious we are in creating projects in these areas. We need long-term solutions that will maintain continued growth for our economy based on our mobility and having an adequate source of water.
For years we have faced the never-ending debate over the construction of crude oil transportation pipelines. This issue has involved and spilled over into Canada. We are at a crossroads, but it is time we face the reality that burning carbon-based fuels must be addressed. One of the best articles I’ve read recently is Alexander Kaufman’s – The US Finally Has a Real Climate Law.
Kaufman does a good job of balancing his article by giving both sides of the debate consideration. One of the major topics he covers is the fact that pipelines can be converted into other usages, other than transporting crude oil. I’m a stockholder in Exxon (XOM) and have been for years. But Exxon is beginning to diversify from dependence on crude oil production. In their west Texas field operations, their source of energy maintaining their facilities is coming from wind turbines generating electricity. Many people are probably not aware that Texas is already the largest producer of wind-generated power. Right in the center of west Texas oil country, the landscape is covered with wind turbines. Only a few weeks ago, it was announced that 24 nautical miles off the coast of Galveston, Texas, a tract of 546,645 acres will be a wind turbine project that will have the potential to power 2.3 million homes. Change is coming for the energy sources we have been using for many, many decades. On a personal note, my monthly electricity bills over the last two months are running more than 200% higher when compared to last year.
Kaufman offers one clear example of the need for pipelines where he discusses the need for capturing carbon dioxide and storing it. This will require massive new numbers of workers and project facilities. A key takeaway from Kaufman is this part of his article: Found just after the –Do Past Perils Doom Future Promises — section of the article. The cited facility was closed as it was not generating a viable economic model. it is now hoped with the new legislation it can be reopened and become a sustainable operation our environment needs it:
The remarkable thing about Petra Nova is that it was built on time and on budget with limited taxpayer subsidies,” Jenkins said. “What it shows is the risk for utilities and power-plant owners to rely on enhanced oil recovery for their revenues. That’s why I’m not as concerned as some of the environmental advocates are.
The W.A. Parish power plant on Sept. 5, 2014, in rural Fort Bend County, Texas. The plant was later equipped with carbon capture and sequestration project known as Petra Nova.
Combining the $35 credit with revenue from drilling oil at $100 per barrel brought the total price per ton of CO2 to about $58 – well above the flat $50 for storing CO2.
The new law changes that. Using carbon for oil drilling will now be worth a $60 per ton tax credit. If the price per barrel of oil remains at about $100, then the net gain from selling a ton of carbon to an oil driller would be about $73 – well below the $85 available per ton of CO2 that gets stored underground, and that assumes oil prices remain high. If a company is capturing 1 million metric tons of carbon dioxide per year, that’s a $12 million difference.
It is now more valuable to store CO2 than to use it for enhanced oil recovery,” said Julio Friedmann, a research fellow at Columbia University’s Center for Global Energy Policy. “That was not quite the case in the last bill. It is unambiguously the case now.”
My point in bringing up this topic is that finally, the federal legislation is making these projects feasible and worth the effort for both oil companies and the environmental companies doing the collecting of the carbon dioxide.
The next area of attention relates to the mobility we have within our nation – goods being transported to the manufacturing facilities, goods being transported to the retail businesses, and people traveling for business or vacations. Recently I saw a chart outlining the ten areas where we have recently seen a moderation in the prices of their product – four of the ten related to transportation and mobility – car rentals, airfares, hotel rates, and gasoline. Each of these examples directly relates to the business model that Construction Partners operates.
The last CPI report showed a slight moderating in the extremely high rate we have seen building for much of 2022. But one month does not signify a continuation in such moderating in prices. We are now nearly through August and let’s assume we will see another small downtick in the CPI rate. That would be good. However, I think it will be the September report that gives us a true indication that we are not moving into a recession. And I expect that we will see one more 75-point upward movement in the federal funds rate. The September numbers should be a better set of numbers as the schools will be open making it more normal. Retailers will or will not be ordering for the Christmas Holiday. Then we can see if our economic system is working better than it has in recent months.
My point – keep your eye on the September data.
And one final point for awareness, now that we have an economic system that is tied to worldwide issues due to manufacturing and distribution, of goods and products. We need to see the hostiles in Ukraine resolved. No war is a good war, but in the case of the situation in Ukraine, as we are fast approaching our winter months, the lack of oil flowing into countries like Germany and the surrounding nations, will bring on additional disruption to their economy, thus the price of oil will exacerbate the pressure on higher oil prices for Europe and even the United States. Currently, Europe is facing its oil crisis and then another crisis that will impact their economies, and even here in the US. My wife and I have a planned European vacation coming up in a few weeks, and daily I’m checking one item for this trip. One might think it would be the exchange rate for the Euro, but that isn’t the case. I’m checking the water levels in the Danube River as currently, the levels are so low, that our river cruise portion might be canceled or altered.
Here in the United States, we see nightly on the news about the plight of our major rivers, especially in the areas where our food supplies are produced. These rivers, like the Colorado River, are at historically low levels. If we don’t solve these issues – the price of energy and food supplies to feed our citizens, we don’t need our political issues and divisive elections adding to our list of woes. We need solutions. Whether we have automobiles moving to EVs or still have the option of gasoline-powered automobiles, the likes of Construction Partners still need to improve and maintain our highway systems and airport facilities.
Let us hope that the current lull in our inflation data holds and we see the CPI dropping rapidly and the GPD growing. We need jobs and we need food and water for our nourishment.
Conclusion:
The 52-week range in the share price has been a low of $18.89 (June 2022) and a high of $44.88 (November 2021). This indicates that since June the share price has rebounded by about 60% off the low. However, we are still about $15.00 below the recent historical high level of $45.00. With such a rapid rise we are probably in for some consolidation trading at the current level before the next leg up will occur. The next catalyst will be the next quarterly report occurring around early November. With the current market capitalization being valued at $1.50 billion, a rule of thumb is that a viable and growing company should garner a market cap twice the revenue stream. With the current quarter being their 4th quarter and full year data, they should show revenues breaking nicely above $1.0 billion. At the top of their current range, they project $1.28 billion in revenue. By applying the two times factor this would reflect a market cap of $2.56 billion, or 70% above the current level.
Based on the latest projections made by the company, I think the growth in both revenue and profits should be obtainable with the 4th quarter/full year’s results. Being ultimately conservative I think we could see the share price rebound to the $45.00 level in the near term if no apocalypse occurs.
Good luck with your future investment decision. Please keep in mind the potential concerns that I’ve outlined in my article. On the political front and worldwide issues, we face; we must find solutions to some of our civil and economic problems.
Be the first to comment