Spruce Point Capital Management has released a report expressing a strong sell research opinion on Construction Partners Inc (NASDAQ:ROAD), a company specializing in infrastructure and road construction.
The report suggests that Construction Partners is experiencing a multitude of pressures that could potentially affect its financial stability and stock value.
The investment firm's analysis indicates that Construction Partners has encountered challenges in achieving organic revenue growth and is dealing with a weakening backlog quality. Additionally, the report points to a decline in the return on capital and issues with free cash flow conversion.
Spruce Point has provided evidence, obtained through Freedom of Information Act requests, that suggests Construction Partners' largest customer, the Florida Department of Transportation, has reduced contract awards by approximately 22% in 2024.
This could represent a significant setback for the company, given the importance of this customer to its operations.
The report also casts doubt on the success of Construction Partners' recent expansion into Texas with the acquisition of Lone Star Paving. Contrary to the company's positive portrayal of the acquisition, Spruce Point's findings suggest that the new addition may not be as beneficial as expected.
Furthermore, Spruce Point has raised concerns regarding the valuation of Construction Partners, citing what it believes to be enterprise value miscalculations, weak aggregate holdings, and poor transparency. The investment firm also questions the sustainability of the company's profit margins.
Based on its analysis, Spruce Point has posited that Construction Partners' share price could face a potential long-term downside risk of 35% to 50%. This opinion is grounded in the firm's findings and represents a significant potential decrease in stock value.
UPDATE: Construction Partners has issued the following statement in response to the short report from Spruce Point:
"Construction Partners, Inc. is a vertically integrated civil infrastructure company specializing in the construction and maintenance of roadways in local markets throughout the Sunbelt. We are proud that, in our 2024 fiscal year, we achieved a 17% year-over-year increase in revenues, 41% increase in net income and 28% increase in Adjusted EBITDA, and we grew our backlog to a record $1.96 billion. We are confident our company is poised for continued growth and value creation.
We are aware of today’s report from Spruce Point Capital Management, a known short-seller that seeks to profit at the expense of shareholders. It is clear that the short-seller made numerous false statements and is deliberately attempting to mislead the market. We strongly refute the assertions in the report.
Of note, the report alleges that Lone Star Paving, our recently acquired Texas platform company, was awarded no prime contracts in the past 24 months, when in fact, the company was awarded 35 prime TXDOT contracts in past 24 months, representing approximately $197 million in revenue. In addition, allegations regarding a decline in our Florida DOT (FDOT) awards in 2024 are materially overstated and ignore the impact of city, county and other public projects using state and federal funds that make Florida such a well-supported and growing market for us. We believe these blatant errors evince a fundamental misunderstanding of our business, our industry and our markets, further undermining the credibility of the short-seller’s report.
Constructions Partners has been consistent in our messaging and our corporate strategy. Importantly, we have provided a detailed fiscal 2025 outlook that demonstrates our confidence in our company’s continued growth and enhanced profitability. We believe strongly in our company, our business model and continued ability to grow our business and enhance shareholder value."
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