Construction Partners (ROAD) Gets Steamrolled After Q4 Report
First off, I apologize for not putting out a Special Bulletin on Construction Partners’ stock yesterday. I took some extra time to re-listen to the conference call replay and ponder the reaction. As many of you know by now, I prefer not to make quick judgements on stocks. Especially with small caps, it’s not always an efficient market in the short-term. So sometimes the best thing to do is nothing. Just sit back and think it over.
With all that said, here’s the deal. Construction Partners reported Q4 results in which revenue grew by 10% to $237.3 million (missing by $13.2 million) while GAAP EPS of $0.32 was up 10% and missed by $0.02. The miss isn’t great, but this is road construction and there are a lot of variables on a quarterly basis. It’s not a subscription software business where 90% of revenue for the next 12 months is already locked in.
That miss came in the context of subdued guidance for 2020, which included revenue in the range of $830 million to $870 million. While that straddled consensus at $850 million, I think analysts wanted more. And in concert with the disclosure that backlog at September 30 (the end of Q4) was $531.1 million, compared to $594.4 million a year ago, makes it seem like business is going a little soft.
Is it? I’m not so sure. While I do want to be careful not to defend a business (too much) I do think there’s some wiggle room for interpretation here. A few months ago, when the company’s fiscal year end concluded, there was a lot more concern about the economy going south. It’s entirely possible that some road spending projects, both public and private, were being reeled in.
Also, management said one of the tough compares in the backlog number is that it’s not going after mega-projects, some of which boosted that figure last year. I don’t see an issue with that. If this management team sees its sweet spot at below the mega-project size, and sticks with it, that’s just fine by me. I know many business owners in this industry. All the good ones know which projects they can do well while making a fair profit, and which ones they can’t. It’s the contractors that don’t know the difference that you want to steer clear of.
Put it all together and I think there’s a good chance this management team is being transparent and honest. They’re saying, look, we’ll grow high single digits and we’ll do some acquisitions but we’re not going to promise you the world. There are some projects in flux and we’re focusing on what we do best because that will lead to good execution and higher profit margins. What we’ve put out there is solid guidance that we think we can hit, and probably exceed. But we have 12 months in front of us. So let’s take this one step at a time.
What’s that mean for the stock? ROAD got knocked around pretty good yesterday but began to climb back in the afternoon and closed near 16. It’s up to around 17 this morning, which puts it right back to where we first jumped in.
This wasn’t a blowout quarter by any stretch of the imagination. But does it mean the company is floundering? I don’t think so. I believe there’s enough gas left in the tank here that small-cap funds will see this as a buying opportunity and continue to accumulate shares. I’m not saying it’s going to go straight back to 20, but I don’t think it’s a bad buy at this level either. I’m keeping at buy and let’s see what happens over the next week or so. BUY