Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Construction Partners is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this small-cap Defense company.
Construction Partners Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 5 year average earnings per share (0.71) * 5 year average book value per share (9.124) = $9.0
After an impressive 24.0% performance over the 12 months, Construction Partners is now trading well over its price because its Graham number is 297.6% above today's share price of $35.78. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Positive Retained Earnings From 2017 To 2022, No Dividend Record, and Decreasing Earnings Per Share
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Construction Partners had positive retained earnings from 2017 to 2022 with an average of $123.13 Million over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.With only 6 years of available data, the Construction Partners cannot meet Graham's requirement of 30% growth over a 10 year period. Growth was disappointing during this period too. The average EPS during 2017 and 2018 was $0.87 based on the reported values of $0.63 and $1.11. Looking to the years 2021 and 2022, we see reported values of $0.39 and $0.41, which averages out to $0.40. This tells us that during this period Construction Partners's earnings per share shrank by -54.02%.
We have no record of Construction Partners offering a regular dividend.
Negative Current Asset to Liabilities Balance and a Decent Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Construction Partners fails on both counts with a current ratio of 1.8 and a debt to net current asset ratio of -1.6.
According to Graham's analysis, Construction Partners is likely a company of low quality, which is trading far above its fair price.
| 2018-12-14 | 2019-12-13 | 2020-12-11 | 2021-11-29 | 2022-11-22 | |
|---|---|---|---|---|---|
| Revenue (MM) | $680 | $783 | $786 | $911 | $1,302 |
| Gross Margins | 15.0% | 15.0% | 16.0% | 13.0% | 11.0% |
| Operating Margins | 7% | 7% | 7% | 3% | 2% |
| Net Margins | 7.0% | 6.0% | 5.0% | 2.0% | 2.0% |
| Net Income (MM) | $51 | $43 | $40 | $20 | $21 |
| Net Interest Expense (MM) | -$1 | -$2 | -$3 | -$2 | -$8 |
| Depreciation & Amort. (MM) | -$25 | -$31 | -$39 | -$50 | -$66 |
| Earnings Per Share | $1.11 | $0.84 | $0.78 | $0.39 | $0.41 |
| EPS Growth | n/a | -24.32% | -7.14% | -50.0% | 5.13% |
| Diluted Shares (MM) | 46 | 51 | 52 | 52 | 52 |
| Free Cash Flow (MM) | $104 | $93 | $155 | $101 | $78 |
| Capital Expenditures (MM) | -$38 | -$38 | -$50 | -$53 | -$61 |
| Net Current Assets (MM) | $71 | $92 | $89 | -$98 | -$222 |
| Long Term Debt (MM) | $48 | $42 | $79 | $206 | $363 |
| Net Debt / EBITDA | -0.52 | -0.35 | -0.61 | 2.04 | 3.49 |
