Construction Partners Stock Cracks Under Pressure As Short Seller Warns Of Potential 50% Downside (UPDATED)

Editor’s note: This story has been updated with a statement from Construction Partners.

A short report from Spruce Point Capital Management on Thursday sent shares of Construction Partners Inc ROAD tumbling. Here’s what investors need to know.

What To Know: Short-selling investment management firm Spruce Point released a new research report on Construction Partners titled, “An As-Faulty Investment,” alleging the company’s business is under pressure and faces 35% to 50% downside.

Spruce Point said that increased pressure on the company’s business has resulted in revenue growth failures and weakening backlog, return on capital and free cash flow conversion. The short seller said it believes that weakness in Construction Partners’ business is being “masked by poor transparency and aggressive financial presentation methods.”

Spruce Point highlighted several concerns related to poor transparency including frequent changes to the company’s market leadership claims and changes to contractor rankings that suggest the business is under pressure.

The short seller noted that Construction Partners rarely breaks down its guidance to show how much growth is organic and instead relies on acquisitions for growth. Spruce Point also said the company’s contract mix is getting worse and that management has made changes to cash flow reporting that appear to be beneficial to reported results.

A Construction Partners spokesperson said in a statement Thursday the company is proud to have achieved a 17% year-over-year revenue increase, 41% increase in net income and 28% increase in adjusted EBITDA in fiscal 2024.

“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,” the spokesperson said.

“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.

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Construction Partners’ biggest customer is the Florida Department of Transportation, but Spruce Point believes contract awards from FDOT are set to decline materially.

“Just a few years ago, Florida was contributing under 10% to total revenue but recently approached 14% in FY24. While ROAD’s total revenue growth was ~16.6% in FY24, Florida’s growth exceeded 48%,” the short seller said.

“However, based on our recent Freedom of Information Act (“FOIA”) request with FDOT, we believe Florida revenue is poised to decelerate.”

Spruce Point estimated that Construction Partners will experience an EBITDA decline of $10 million to $15 million in 2025 based on a slowing of Florida contract awards.

The Construction Partners spokesperson said short seller allegations regarding 2024 FDOT awards “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.”

Spruce Point said it believes Construction Partners is focused on expanding to Texas and Oklahoma to deflect attention away from declines in Florida. The short seller is skeptical about the financials of the company’s recent acquisition of Lone Star Paving, alleging that market models have failed to accurately calculate equity and enterprise values, which has led to an inflated valuation.

“Valuing ROAD’s shares in-line with industry peers and its long-term average multiple suggest 35%–50% long-term potential downside risk ($46 – $60 per share). We expect ROAD’s share price to meaningfully underperform its industry peers and the overall U.S. equity market,” Spruce Point said.

ROAD Price Action: Construction Partners shares were down 10.6% at $82.86 at the time of publication Thursday, according to Benzinga Pro.

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