Target Hospitality (TH)

Workforce housing company Target Hospitality (NASDAQ:TH) announced better-than-expected revenue in Q1 CY2025, but sales fell by 34.5% year on year to $69.9 million. The company’s full-year revenue guidance of $275 million at the midpoint came in 0.7% above analysts’ estimates. Its GAAP loss of $0.07 per share was significantly below analysts’ consensus estimates.

Company Overview

Building mini-communities at places such as oil drilling sites, Target Hospitality (NASDAQ:TH) is a provider of specialty workforce lodging accommodations and services.

Airlines, hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional airlines, hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.

Target Hospitality's primary competitors include Civeo (NYSE:CVEO), Black Diamond Group (TSX:BDI), ATCO (TSX:ACO.X), ProPetro Holding (NYSE:PUMP), and Halliburton (NYSE:HAL).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Target Hospitality grew its sales at a weak 2.4% compounded annual growth rate. This was below our standards and is a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or trend. Target Hospitality’s performance shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 21.7% annually.

We can better understand the company’s revenue dynamics by analyzing its number of utilized beds, which reached 9,898 in the latest quarter. Over the last two years, Target Hospitality’s utilized beds averaged 2.8% year-on-year declines. Because this number is higher than its revenue growth during the same period, we can see the company’s monetization has fallen.

This quarter, Target Hospitality’s revenue fell by 34.5% year on year to $69.9 million but beat Wall Street’s estimates by 7%.

We also like to judge companies based on their projected revenue growth, but not enough Wall Street analysts cover the company for it to have reliable consensus estimates.

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 been trending down over the last 12 months, but it still averaged 32.8% over the last two years, elite for a consumer discretionary business. This shows it’s an well-run company with an efficient cost structure, and we wouldn’t weigh the short-term trend too heavily.

This quarter, Target Hospitality generated an operating profit margin of negative 1.5%, down 30.1 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Target Hospitality’s EPS grew at a decent 10.8% compounded annual growth rate over the last five years, higher than its 2.4% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, Target Hospitality reported EPS at negative $0.07, down from $0.20 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. We also like to analyze expected EPS growth based on Wall Street analysts’ consensus projections, but there is insufficient data. This signals Target Hospitality could be a hidden gem because it doesn’t have much coverage among professional brokers.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Target Hospitality has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the consumer discretionary sector, averaging 24.5% over the last two years.

Target Hospitality burned through $12.65 million of cash in Q1, equivalent to a negative 18.1% margin. The company’s cash flow turned negative after being positive in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although Target Hospitality hasn’t been the highest-quality company lately because of its poor top-line performance, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 22.5%, impressive for a consumer discretionary business.

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. Fortunately, Target Hospitality’s ROIC has increased significantly over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Target Hospitality reported $34.47 million of cash and $40.9 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $164.6 million of EBITDA over the last 12 months, we view Target Hospitality’s 0.0× net-debt-to-EBITDA ratio as safe. We also see its $7.70 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Target Hospitality beat analysts’ revenue expectations this quarter. We were also happy its EBITDA outperformed Wall Street’s estimates. On the other hand, its EPS missed and its full-year EBITDA guidance fell short of Wall Street’s estimates. Zooming out, we think this was a mixed quarter. The stock traded up 2.6% to $7.28 immediately following the results.

Updated: May 22, 2025 at 10:09 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Target Hospitality.

In our opinion, Target Hospitality is a solid company. Although its revenue growth was weak over the last five years and analysts expect growth to slow over the next 12 months, its impressive operating margins show it has a highly efficient business model. And while its number of utilized beds has disappointed, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Target Hospitality’s EV-to-EBITDA ratio based on the next 12 months is 22.9x. Looking at the consumer discretionary space right now, Target Hospitality trades at a compelling valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $8.75 on the company (compared to the current share price of $7.62), implying they see 14.8% upside in buying Target Hospitality in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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