Over the last six months, Target Hospitality shares have sunk to $6.80, producing a disappointing 9.8% loss - worse than the S&P 500’s 2.9% drop. This may have investors wondering how to approach the situation.

Is now the time to buy Target Hospitality, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Target Hospitality Not Exciting?

Despite the more favorable entry price, we're swiping left on Target Hospitality for now. Here are three reasons why we avoid TH and a stock we'd rather own.

1. Weak Growth in Utilized Beds Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Target Hospitality, our preferred volume metric is utilized beds). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Target Hospitality’s utilized beds came in at 11,911 in the latest quarter, and over the last two years, averaged 4.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Target Hospitality’s revenue to drop by 29.3%, a decrease from its 12.3% annualized declines for the past two years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

3. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Target Hospitality’s EPS grew at an unimpressive 7.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 3.8% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

Final Judgment

Target Hospitality isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 8.7× forward EV-to-EBITDA (or $6.80 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.

Stocks We Would Buy Instead of Target Hospitality

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