Target Hospitality (TH) is a specialty rental and hospitality services company that primarily caters to the Oil & Gas Equipment & Services industry.  The company has 4 segments: Permian Basin; Bakken Basin; Government; and TCPL Keystone Pipeline. Currently, the company owns just under 14,000 beds across 26 different locations.

Given that a large bulk of TH’s revenue comes from companies in the energy sector, it’s not surprising that revenues were depressed along with energy prices for all of last year. Despite oil prices starting to move higher in the latter part of 2020, activity in the shale regions didn’t pick up as shale projects are only economically viable with oil prices above $70.

Now, the situation is rapidly improving, as oil prices are above $80. There is also a material increase in rig counts in the shale patches with more if oil keeps trending higher. The passing of the infrastructure bill is another potential boom for TH’s government unit. Already, TH’s revenues are on the mend as sales in the last quarter were only 8% below 2019 levels. 

Read on to find out why TH is my featured stock under $10 this week…

Earnings

TH’s Q3 earnings are expected to come in strong after a big turnaround in Q2 that saw revenues return to pre-pandemic levels. Another positive is that the company recently upgraded its forecast for 2021 earnings and revenue. The results led to a major breakout in the stock as shares were 20% higher over the next week.

Overall, TH’s full-year revenue is expected to come in between $280 and $285 million which is about 15% below 2019’s $320 million. However, by other measures, the company is doing better as it is set to generate $80 million in cash flow which is quite impressive as this is about 20% of its total market cap. 

Q3 revenue is forecast to be $77 million, a 66% increase with EPS of $0.02 per share. This would be the company’s first profit in the post-pandemic period.

Growth

TH is a mix of an energy stock and a hotel stock. Fortunately for investors, both sectors are currently appreciating and moving to multi-year highs. The burst in travel demand, following the drop in case counts, is leading to increased pricing power for hotels. 

Energy demand has been stronger than expected, while supply cuts were quite aggressive in the early days of the pandemic and full production hasn’t been restored. 

For shale production and rig counts to return back to peak activities as seen in 2013 to 2015, oil prices likely would have to get above $100. I don’t think this is unthinkable given strong demand due to better than expected economic growth while supply continues to be constrained. 

In 2018 and 2019, TH’s stock price was between $10 and $12. Around this time, the US had about an average of 800 rigs in the shale patch. Currently, we have 450 which is still a stark improvement from less than 200 in the summer of 2020.

POWR Ratings

This upside potential and exposure to positive, macro trends is why TH has an Overall Rating of a B which equates to a Buy rating from the POWR Ratings. B-rated stocks have posted an average annual return of 19.7% which compares favorably to the S&P 500’s annual return of 7.1%. 

It’s also not surprising that TH has a B for Growth given that the return of rig counts to pre-pandemic levels is a potent tailwind for earnings in the next few quarters. The POWR Ratings also evaluate stocks by other components such as Value, Momentum, Stability, Sentiment, Quality, Sentiment, and Industry. To see these component grades, click here.

Conclusion

This combination of value and growth potential means that TH should be on every investors’ radar. A return to 2019 price levels is not out of the question given the strong fundamentals of the oil market. 

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TH shares were trading at $4.78 per share on Thursday afternoon, up $0.29 (+6.46%). Year-to-date, TH has gained 202.53%, versus a 25.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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