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Sterling (STRL) Up 47.2% YTD on Infrastructural Push: What's Next?
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Shares of Sterling Infrastructure, Inc. (STRL - Free Report) have soared 47.2% year to date (YTD), significantly outpacing the 21% gain in the Zacks Engineering - R and D Services industry. Additionally, STRL's sector has increased 9.9%, while the S&P 500 has risen 16.9% in the same period. Over the past three years, Sterling’s shares have delivered an astonishing total return of 520.9% compared with the S&P 500's modest return of 30.2%.
Sterling, a premier U.S. service provider specializing in transportation, civil construction, and e-infrastructure solutions, is benefiting from long-term artificial intelligence (AI) tailwinds. The company is witnessing sustained expansion across its various sectors, including data centers and aviation markets as well as from its strategic shift toward large, mission-critical projects. This growth is evident in its exponentially increasing backlog, fueled by robust demand for infrastructure solutions.
STRL’s YTD Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest continued strong performance for STRL. Notably, the 50-day SMA continues to read higher than the 200-day SMA, signaling the bullish trend. This technical strength underscores positive market sentiment and confidence in STRL’s financial health and prospects.
STRL Trades Above 200-Day SMA
Image Source: Zacks Investment Research
Given the remarkable surge in STRL's stock price, the pivotal question for investors is whether to buy, hold, or sell shares at this juncture.
Let's examine the stock's underlying fundamentals to make an informed assessment.
Strategic Transformation: Since 2016, STRL has remained focused on building and transforming the company with a strategic vision comprising solidifying the base, growing high-margin products and services, and expanding into adjacent markets. The company’s core business has traditionally been low-bid heavy highway projects in its Transportation Solutions segment. These projects typically yield gross margins of 7-8%, though prior to 2016, the margin was around 4%.
In 2016, STRL adopted a strategy to enhance bid discipline and reduce project losses. Since implementing this strategy, the company has increased the heavy highway backlog gross margin to 11.3% as of Dec 31, 2023. STRL anticipates further margin improvements as it continues executing this strategy. STRL also implemented a strategy to shift its project focus from low-bid heavy highway projects to higher-margin alternatives like airports, commercial ventures, and piling and shoring.
Additionally, STRL pursues growth through acquisitions, targeting companies with gross margins of 15% or higher. This strategic approach aims to diversify its product offerings, expand its service portfolio, and broaden its customer base, enhancing competitiveness in its markets. Since 2016, STRL has completed six acquisitions and plans to explore additional strategic opportunities for growth through acquisitions in the future.
Image Source: Sterling Infrastructure, Inc.
Focus on E-Infrastructure: In recent years, STRL has achieved double-digit revenue growth, supported by expanding margins as it increasingly focuses on e-infrastructure. The company's largest and most profitable segment, E-Infrastructure, witnessed a 12% increase in operating income in first-quarter 2024 compared to the previous year, with operating margins expanding 290 basis points to reach 14.7%. This growth reflects improved supply chain dynamics and a strategic shift toward large-scale, mission-critical projects.
Despite a 10% revenue decline in the first quarter due to weather and project scheduling, STRL anticipates continued strong revenue growth of high-single to low-double digits in 2024 from its current backlog, driven largely by the data center market's demand for AI technology advancements. Data centers now constitute 40% of STRL’s E-Infrastructure backlog, highlighting their pivotal role in driving future growth.
Solid Backlog Level: After delivering record earnings results in 2023, STRL had a great start to 2024. Demand trends across all its end markets remain strong. The company ended the quarter with a backlog of $2.35 billion, which is up 45% from the first quarter of 2023, on strong demand in the data center and aviation markets.
Image Source: Sterling Infrastructure, Inc.
Solid Operating Cash Flow Profile: The financial performance of Sterling, particularly its revenue and EBITDA growth, significantly influences its free cash flow conversion. As depicted in the chart below, the company's operating cash flow has nearly doubled approximately every two years. This trend not only enhances flexibility but also furnishes capital for future growth investments.
As of the first quarter of 2024-end, the company's balance sheet reflects a modest level of debt, consisting of $337.6 million in term loan borrowings. Additionally, it holds a $75 million revolving credit facility, which is currently untapped. The company boasts a cash balance of $480.4 million, surpassing its total debt. Scheduled repayments on the term loan amount to $26.3 million in 2024, $26.3 million in 2025, and $6.6 million in 2026. With an EBITDA Debt Coverage Ratio of 1.1x, the company maintains a conservative leverage profile.
Although the company does not pay a dividend, it allocates substantial resources to organic growth initiatives, mergers and acquisitions (M&A), and share buybacks.
Image Source: Sterling Infrastructure, Inc.
What May Pullback STRL?
In assessing the risks to the investment thesis, significant concerns include a potential downturn in AI expenditure. Macroeconomic factors such as rising interest rates typically dampen infrastructure investments as borrowing costs escalate, thereby increasing the financial burden of projects. Additionally, intensified competition poses a formidable threat. With more players entering the market, Sterling may be compelled to slash prices to secure contracts, potentially eroding profit margins.
STRL Stock Not Cheap
STRL’s stock is currently slightly overvalued compared to its industry, as shown in the chart below.
STRL is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 23.5, which is above its one-year median of 17.62. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about STRL’s future earnings. Such a high valuation compared to historical levels raises concerns about the sustainability of its current price, potentially setting the stage for a market correction if the company's future performance fails to meet expectations.
Even the stock is trading higher than companies like Primoris Services Corporation (PRIM - Free Report) , Granite Construction Incorporated (GVA - Free Report) and Dycom Industries, Inc. (DY - Free Report) . PRIM, GVA and DY are trading with forward 12-month P/E multiples of 17.62, 12.82 and 22.16, respectively.
Image Source: Zacks Investment Research
Again, STRL’s trailing 12-month return on equity (ROE) of 25.1% is better than its industry average of 18.5%.
Image Source: Zacks Investment Research
STRL Estimate Movement
The Zacks Consensus Estimate for 2024 earnings per share has remained unchanged over the past 60 days. This depicts that there is limited upside potential for the stock as of now. Yet, the estimated figure indicates 18.6% year-over-year growth for 2024. STRL delivered a trailing four-quarter earnings surprise of 22.3%, on average.
Image Source: Zacks Investment Research
Final Thoughts
As the infrastructure sector continues to grow, companies such as Sterling are poised to capitalize on this trend, especially due to their robust industry reputation and extensive experience partnering with other leading firms. Moreover, existing data center capacity currently addresses only a fraction of the demand required to sustain artificial intelligence and other advancing technologies.
Notably, based on the high end of its 2024 guidance, STRL’s revenues are expected to grow 12%, net income to increase 23%, and EBITDA to improve 16%. With solid revenue and EBITDA guidance in place for 2024, STRL stock remains one of the key mid-cap stocks in the investment world.
However, considering the expensive valuation, muted estimated revision trend and the macro-economic risk associated with the high-interest rate environment, cautious investors may consider waiting for clearer signs of stabilization in Sterling’s performance and market conditions before initiating a position for this Zacks Rank #3 (Hold) stock.
Image: Bigstock
Sterling (STRL) Up 47.2% YTD on Infrastructural Push: What's Next?
Shares of Sterling Infrastructure, Inc. (STRL - Free Report) have soared 47.2% year to date (YTD), significantly outpacing the 21% gain in the Zacks Engineering - R and D Services industry. Additionally, STRL's sector has increased 9.9%, while the S&P 500 has risen 16.9% in the same period. Over the past three years, Sterling’s shares have delivered an astonishing total return of 520.9% compared with the S&P 500's modest return of 30.2%.
Sterling, a premier U.S. service provider specializing in transportation, civil construction, and e-infrastructure solutions, is benefiting from long-term artificial intelligence (AI) tailwinds. The company is witnessing sustained expansion across its various sectors, including data centers and aviation markets as well as from its strategic shift toward large, mission-critical projects. This growth is evident in its exponentially increasing backlog, fueled by robust demand for infrastructure solutions.
STRL’s YTD Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest continued strong performance for STRL. Notably, the 50-day SMA continues to read higher than the 200-day SMA, signaling the bullish trend. This technical strength underscores positive market sentiment and confidence in STRL’s financial health and prospects.
STRL Trades Above 200-Day SMA
Image Source: Zacks Investment Research
Given the remarkable surge in STRL's stock price, the pivotal question for investors is whether to buy, hold, or sell shares at this juncture.
Let's examine the stock's underlying fundamentals to make an informed assessment.
Strategic Transformation: Since 2016, STRL has remained focused on building and transforming the company with a strategic vision comprising solidifying the base, growing high-margin products and services, and expanding into adjacent markets. The company’s core business has traditionally been low-bid heavy highway projects in its Transportation Solutions segment. These projects typically yield gross margins of 7-8%, though prior to 2016, the margin was around 4%.
In 2016, STRL adopted a strategy to enhance bid discipline and reduce project losses. Since implementing this strategy, the company has increased the heavy highway backlog gross margin to 11.3% as of Dec 31, 2023. STRL anticipates further margin improvements as it continues executing this strategy. STRL also implemented a strategy to shift its project focus from low-bid heavy highway projects to higher-margin alternatives like airports, commercial ventures, and piling and shoring.
Additionally, STRL pursues growth through acquisitions, targeting companies with gross margins of 15% or higher. This strategic approach aims to diversify its product offerings, expand its service portfolio, and broaden its customer base, enhancing competitiveness in its markets. Since 2016, STRL has completed six acquisitions and plans to explore additional strategic opportunities for growth through acquisitions in the future.
Image Source: Sterling Infrastructure, Inc.
Focus on E-Infrastructure: In recent years, STRL has achieved double-digit revenue growth, supported by expanding margins as it increasingly focuses on e-infrastructure. The company's largest and most profitable segment, E-Infrastructure, witnessed a 12% increase in operating income in first-quarter 2024 compared to the previous year, with operating margins expanding 290 basis points to reach 14.7%. This growth reflects improved supply chain dynamics and a strategic shift toward large-scale, mission-critical projects.
Despite a 10% revenue decline in the first quarter due to weather and project scheduling, STRL anticipates continued strong revenue growth of high-single to low-double digits in 2024 from its current backlog, driven largely by the data center market's demand for AI technology advancements. Data centers now constitute 40% of STRL’s E-Infrastructure backlog, highlighting their pivotal role in driving future growth.
Solid Backlog Level: After delivering record earnings results in 2023, STRL had a great start to 2024. Demand trends across all its end markets remain strong. The company ended the quarter with a backlog of $2.35 billion, which is up 45% from the first quarter of 2023, on strong demand in the data center and aviation markets.
Image Source: Sterling Infrastructure, Inc.
Solid Operating Cash Flow Profile: The financial performance of Sterling, particularly its revenue and EBITDA growth, significantly influences its free cash flow conversion. As depicted in the chart below, the company's operating cash flow has nearly doubled approximately every two years. This trend not only enhances flexibility but also furnishes capital for future growth investments.
As of the first quarter of 2024-end, the company's balance sheet reflects a modest level of debt, consisting of $337.6 million in term loan borrowings. Additionally, it holds a $75 million revolving credit facility, which is currently untapped. The company boasts a cash balance of $480.4 million, surpassing its total debt. Scheduled repayments on the term loan amount to $26.3 million in 2024, $26.3 million in 2025, and $6.6 million in 2026. With an EBITDA Debt Coverage Ratio of 1.1x, the company maintains a conservative leverage profile.
Although the company does not pay a dividend, it allocates substantial resources to organic growth initiatives, mergers and acquisitions (M&A), and share buybacks.
Image Source: Sterling Infrastructure, Inc.
What May Pullback STRL?
In assessing the risks to the investment thesis, significant concerns include a potential downturn in AI expenditure. Macroeconomic factors such as rising interest rates typically dampen infrastructure investments as borrowing costs escalate, thereby increasing the financial burden of projects. Additionally, intensified competition poses a formidable threat. With more players entering the market, Sterling may be compelled to slash prices to secure contracts, potentially eroding profit margins.
STRL Stock Not Cheap
STRL’s stock is currently slightly overvalued compared to its industry, as shown in the chart below.
STRL is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 23.5, which is above its one-year median of 17.62. This elevated P/E ratio could indicate that the stock is overvalued, suggesting that investors might be overly optimistic about STRL’s future earnings. Such a high valuation compared to historical levels raises concerns about the sustainability of its current price, potentially setting the stage for a market correction if the company's future performance fails to meet expectations.
Even the stock is trading higher than companies like Primoris Services Corporation (PRIM - Free Report) , Granite Construction Incorporated (GVA - Free Report) and Dycom Industries, Inc. (DY - Free Report) . PRIM, GVA and DY are trading with forward 12-month P/E multiples of 17.62, 12.82 and 22.16, respectively.
Image Source: Zacks Investment Research
Again, STRL’s trailing 12-month return on equity (ROE) of 25.1% is better than its industry average of 18.5%.
Image Source: Zacks Investment Research
STRL Estimate Movement
The Zacks Consensus Estimate for 2024 earnings per share has remained unchanged over the past 60 days. This depicts that there is limited upside potential for the stock as of now. Yet, the estimated figure indicates 18.6% year-over-year growth for 2024. STRL delivered a trailing four-quarter earnings surprise of 22.3%, on average.
Image Source: Zacks Investment Research
Final Thoughts
As the infrastructure sector continues to grow, companies such as Sterling are poised to capitalize on this trend, especially due to their robust industry reputation and extensive experience partnering with other leading firms. Moreover, existing data center capacity currently addresses only a fraction of the demand required to sustain artificial intelligence and other advancing technologies.
Notably, based on the high end of its 2024 guidance, STRL’s revenues are expected to grow 12%, net income to increase 23%, and EBITDA to improve 16%. With solid revenue and EBITDA guidance in place for 2024, STRL stock remains one of the key mid-cap stocks in the investment world.
However, considering the expensive valuation, muted estimated revision trend and the macro-economic risk associated with the high-interest rate environment, cautious investors may consider waiting for clearer signs of stabilization in Sterling’s performance and market conditions before initiating a position for this Zacks Rank #3 (Hold) stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.