On Monday, DA Davidson increased the price target for Construction Partners Inc (NASDAQ:ROAD) to $75 from the previous $55, while maintaining a Neutral rating on the stock. The adjustment comes as the company extends its platform into new growth territories.
Despite the potential for increased leverage, which may limit deal activity in the short term, the firm sees the company's valuation supported by various factors.
Construction Partners is experiencing an expansion of its existing platform, which is anticipated to drive growth. However, this expansion could lead to increased leverage that might restrict the company's ability to engage in further deal activities for the time being. The raised price target is based on 15 times and 14 times the firm's fiscal year 2025 and 2026 EBITDA estimates, respectively, and includes pro forma costs for the acquisition of Lone Star.
The firm acknowledges that the price multiples are premium compared to the average and median of the infrastructure services peers. Nonetheless, the potential for margin improvement with the integration of Lone Star, opportunities for expansion in the Texas market, and ongoing organic growth in core markets are expected to sustain the company's valuation.
DA Davidson estimates that Construction Partners' net debt to fiscal year 2025 EBITDA ratio will be 3.1 times. Management is reportedly concentrating on reducing this ratio to between 1.5 and 2.5 times over the next four to six quarters. It is presumed that the company will allocate nearly all of its free cash flow to debt reduction in the upcoming quarters, which is likely to limit the potential for other acquisitions.
InvestingPro Insights
Construction Partners Inc (NASDAQ:ROAD) has been experiencing significant growth, as reflected in both its financial metrics and market performance. According to InvestingPro data, the company's revenue grew by 18.84% over the last twelve months, with a notable 22.73% quarterly growth in Q3 2024. This aligns with DA Davidson's observation of the company's expansion into new growth territories.
The stock's performance has been particularly strong, with a 95.65% price total return over the past year and a 49.31% return over the last six months. This impressive growth trajectory is further supported by an InvestingPro Tip indicating that ROAD is trading near its 52-week high, currently at 98.49% of that peak.
However, investors should note that the company's P/E ratio stands at 62.5, which an InvestingPro Tip suggests is a high earnings multiple. This high valuation could be a factor in DA Davidson's decision to maintain a Neutral rating despite raising the price target.
For those seeking a more comprehensive analysis, InvestingPro offers 17 additional tips for Construction Partners Inc, providing deeper insights into the company's financial health and market position.
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