Target Hospitality (TH) is a specialty rental and hospitality services company that primarily caters to the Oil & Gas Equipment & Services industry. The company has 4 segments: Permian Basin; Bakken Basin; Government; and TCPL Keystone Pipeline. Currently, the company owns just under 14,000 beds across 26 different locations.
Given that a large bulk of TH’s revenue comes from companies in the energy sector, it’s not surprising that revenues were depressed along with energy prices until last year. Now, North American energy production is roaring back to life, and TH is a major beneficiary. However, it’s found another growth channel that is potentially bigger than energy.
Read on to find out why TH is my featured stock of the week…
Background
Until a few years ago, TH’s revenues were primarily connected to the energy industry. The rapid growth in shale oil production and other forms of energy extraction in North America led to the need for housing for short-term workers. So, although it’s technically a hospitality stock, its fortunes were more tied to oil prices.
Thus, TH grew along with this boom but naturally suffered when energy production dried up as oil prices collapsed. And, shares started moving higher, once it became clear that production would increase as prices climbed towards $100. Most shale projects are viable with oil prices above $70, although this might be slightly higher now due to inflation.
So, it also wasn’t surprising that TH’s stock started dropping along with oil prices - about 35% between May and July of this year. Of course, the company was able to reverse this momentum due to securing this massive government contract.
Earnings
TH’s stock is up more than 100% over the past week as the company a major increase in its full-year guidance. The company received a major government contract, and it now sees beteween $500 million and $510 million for 2022 revenue and around $300 million of free cash flow.
This source of revenue is also attractive in a recessionary environment as this revenue base is much less economically sensitive. It also means that TH’s shares are extremely cheap even after its recent gains with an $877 million market cap.
Value
Even with its recent gains, TH remains extremely cheap with a forward P/E of under 3 and a P/FCF of around 4 in 2022. Such strong cash-flow generation lends itself to dividends or buybacks which would further propel the stock higher.
The stock is back to its highs, last seen in 2018 and 2019. However, the company is in a much better position with double the revenues and triple the earnings. This means that the stock price is likely to go higher, although there is likely to be some profit-taking in the interim.
POWR Ratings
This upside potential and exposure to positive, macro trends is why TH has an Overall Rating of a B which equates to a Buy rating from the POWR Ratings. B-rated stocks have posted an average annual return of 21.1% which compares favorably to the S&P 500’s annual return of 8.0%.
It’s also not surprising that TH has a B for Growth given that the return of rig counts to pre-pandemic levels is a potent tailwind for earnings in the next few quarters. The POWR Ratings also evaluate stocks by other components such as Value, Momentum, Stability, Sentiment, Quality, Sentiment, and Industry. To see these component grades, click here.
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TH shares were trading at $11.57 per share on Thursday morning, up $0.19 (+1.67%). Year-to-date, TH has gained 225.00%, versus a -21.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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