Construction Partners, Inc. (ROAD) stock intrinsic value fair value estimate & owner earnings analysis

Construction Partners is an asphalt paving and road construction company that runs its own hot-mix asphalt plants. It operates in Alabama, Florida, Georgia, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. About 65% of construction revenue comes from publicly funded work, and state transportation departments alone were 43.4% of fiscal 2025 revenue, with no single department above 10%. Contract backlog was $3.0 billion at September 30, 2025, up from $2.0 billion a year earlier, and the company expected about 78% of it to be completed within twelve months. The business changed in fiscal 2025 (year ended September 30, 2025). On November 1, 2024 it bought Lone Star Paving in Texas for total consideration of $977.2 million, with the cash portion funded from an $850 million Term Loan B, and then added Overland (Oklahoma, January 2025), Mobile Asphalt Company (Alabama, February 2025), PRI (Tennessee, May 2025) and Durwood Greene (Texas, August 2025). Revenue rose from $1.82 billion to $2.81 billion and debt rose from $515 million to $1.63 billion, with net interest expense up from $19.1 million to $90.4 million. Because the company is now a different size and carries much more debt, we measure its earning power from fiscal 2025 rather than from earlier years. How we measure earnings: we start with cash from operations, remove the swings from customer payments, supplier payments and inventory, subtract stock-based pay as a real cost, and subtract the spending needed to keep plants and equipment running. In fiscal 2025 that gives $132.5 million, or $2.39 per share, after $291.3 million of operating cash flow, a $16.1 million working-capital drag added back, $37.0 million of stock compensation and $137.9 million of equipment spending. We treated all of that equipment spending as upkeep. The usual approach would set aside part of it as growth spending based on the revenue increase, but revenue rose 54% in fiscal 2025 in a year of five acquisitions, and that approach would have cut upkeep to $81.3 million, or 2.9% of revenue. That is below the 3.6% to 6.7% of revenue the business spent on upkeep in each of fiscal 2019 through 2024 on the same method. Fiscal 2025 also carried $21.8 million of acquisition-related expenses, which we did not add back. Earlier years on the same basis were $2.05 per share in fiscal 2024 and between $0.39 and $0.86 in each of fiscal 2018 through 2023. The jump reflects both larger scale and higher profitability, and the debt taken on in fiscal 2025 is a real cost that is already inside these cash flows for eleven months of the year. Per-share value is based on about 56.3 million diluted shares, the count reported for the quarter ended June 30, 2026, which gives an earnings base of $2.35 per share. Since the year ended, results have supported that level. In the nine months to June 30, 2026, revenue was $2.58 billion versus $1.91 billion a year earlier (up 35%), net income was $85.9 million versus $45.2 million, and operating cash flow was $240.9 million versus $179.3 million. Equipment spending also rose to $144.2 million from $104.9 million. We did not raise the earnings base on this, because we require several quarters of confirmation and the comparison is flattered by the acquisitions completed during fiscal 2025. Growth we credit: in fiscal 2025 earnings per share grew 16.7%. For the first year of the base case we assume 5%, below that figure. The specific reason is that four acquisitions closed during fiscal 2025 (Overland on January 2, Mobile Asphalt on February 3, PRI on May 1 and Durwood Greene on August 1) contributed only part of that year, so their full-year effect is not yet in the fiscal 2025 results. Beyond that first year we credit no further growth. The company has acquired 54 businesses since its inception and could keep doing so, but each acquisition costs cash that is not deducted in our earnings figure, and the Lone Star deal was far larger than any acquisition in the prior three years (the largest of those had a cash cost of $210.7 million), so we leave acquisition-driven growth out. Growth from higher road-building budgets or share gains is also left out because it has not yet happened. The three cases: Bear case, $12.23 per share. Earnings settle at $1.30 per share, about 45% below the base level, for ten years and then fade to zero over the following ten. The named pressures are the $1.63 billion of debt and its interest cost, government contracts that customers can cancel at any time with payment only for work done, and rising costs for fuel and labor that the company says it cannot always pass through on jobs already in backlog. Earnings were below $0.90 per share in every year from fiscal 2018 to 2023, so a give-back of much of the recent improvement is a fair downside. Base case, $28.36 per share. Earnings of $2.35 per share rise 5% in year one to $2.47 and then stay flat for twenty years, after which we assume nothing. Road maintenance is recurring work and the business has produced positive earnings every year since fiscal 2018, but that eight-year record does not support crediting more than twenty years. Bull case, $46.03 per share. Earnings rise 12% in year one, supported by the 50% larger backlog and the nine-month cash flow growth to June 2026, then 5% a year for the next nine years to about $4.09 per share, then stay flat for fifteen more years. This case assumes the enlarged plant network and the larger backlog keep converting into profit at roughly the pace seen in the first nine months of fiscal 2026. What we tested: the biggest judgement was the equipment spending. Had we followed the usual growth-spending approach for fiscal 2025, earnings would have been $3.42 per share, about 43% higher, so the result is sensitive to this choice. We used the lower figure because total equipment spending has been between 4.8% and 6.7% of revenue in every year since fiscal 2018 and rose again in the first nine months of fiscal 2026. Another test was whether the recent cash flow was a one-off: working-capital effects in fiscal 2025 were small, and the fiscal 2026 nine-month figures point the same way. What would make this wrong: a downturn in state and federal road budgets, a sharp rise in asphalt, fuel or labor costs on fixed-price work, trouble integrating the recent acquisitions, or the $1.63 billion of debt weighing on results if profits fall. A sustained rise in earnings above our base, confirmed over more quarters, would make the base case too low. The margin-of-safety price is $15 per share, about half our base value and somewhat above our bear case, because the company is levered after a very large acquisition and its earnings were far lower before fiscal 2024.