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In the first quarter, Sterling’s revenues, though, missed the Zacks Consensus Estimate by 2.9% but grew 9% year over year despite challenging weather. The company achieved a record gross margin of 17.5% and delivered earnings per share (EPS) of $1.00 (beating the consensus mark by 22%). It ended the quarter with a backlog exceeding $2.35 billion, up 45% year over year, and secured awards worth $642 million, reflecting strong demand in the data center and aviation markets. Cash flow from operations was $50 million.
Segment-wise, E-Infrastructure's 294 basis point margin expansion, Transportation Solutions' 34% revenue growth, and Building Solutions' 23% revenue increase were notable. Sterling raised its 2024 net income and EPS guidance, anticipating a strong year with 12% revenue growth and 16% EBITDA improvement.
Sterling, a premier U.S. service provider specializing in transportation, civil construction, and e-infrastructure solutions, has an impressive track record of surpassing earnings expectations, exceeding the consensus mark in each of the last four quarters. The average surprise over this period is 22.3%, as shown in the chart below.
Image Source: Zacks Investment Research
Trend in Estimate Revision
The Zacks Consensus Estimate for the second-quarter EPS has decreased to $1.43 from $1.47 over the past 30 days. The estimated figure indicates a 12.6% increase from the year-ago EPS of $1.27. Also, the consensus mark for revenues is $553.7 million, indicating 6% year-over-year growth.
Image Source: Zacks Investment Research
What Our Model Indicates
Our proven model does not predict an earnings beat for STRL this time around. The company possesses the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. This is not the case here.
Earnings ESP: STRL has an Earnings ESP of -3.16%. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.
Sterling is poised for growth in the second quarter of 2024, driven by long-term artificial intelligence (AI) trends. The company continues to expand across various sectors, including data centers and aviation markets, benefiting from a strategic shift toward large, mission-critical projects.
Segment-wise, E-Infrastructure, STRL's largest and fastest-growing segment, accounted for 42% of first-quarter 2024 revenues. Its customers include Amazon.com, Inc. (AMZN - Free Report) , Meta Platforms, Inc. (META - Free Report) , Walmart Inc. (WMT - Free Report) and Hyundai Motor Group. It is set to benefit from multi-year capital deployment in data centers, advanced manufacturing, and industrial sectors. Enhanced supply chain dynamics and a focus on large-scale, mission-critical projects will boost sales and margins. Data centers, now 40% of STRL’s E-Infrastructure backlog, play a crucial role in future growth, driven by the demand for AI technology advancements.
Transportation Solutions segment (which accounted for 34% of total first-quarter 2024 revenues) is expected to benefit from strong broad-based demand and margin growth across its entire geographic footprint. The segment is expected to benefit from robust state and local funding, the Infrastructure Bill's allocation of $643 billion for transportation programs (including $284 billion in incremental funding), and a $25 billion investment in airports over five years.
Sterling’s Building Solutions segment (which accounted for 24% of total first-quarter 2024 revenues) is its second-highest-margin segment, focusing on concrete foundations for residential and commercial projects. Operating in high-growth markets like Dallas, Houston, and Phoenix, this segment benefits from a quick-turn, asset-light business model, leading to fast cash cycles and high returns on invested capital.
Acquisitions have significantly contributed to STRL's growth by expanding its operations and boosting revenues. Strategic investments for profitability and efficient service execution, along with accretive buyouts, are anticipated to drive substantial second-quarter growth. Additionally, a reduced income tax rate and lower net interest expenses for the rest of the year are expected to enhance profitability.
Price Performance & Valuation
STRL’s stock has exhibited an upward movement in the year-to-date period. The stock has gained 32.3% compared with the industry’s rise of 25.1% in the same time frame.
YTD Price Performance
Image Source: Zacks Investment Research
Let's assess the value STRL offers to investors at its current levels.
Currently, STRL is trading at a forward 12-month price-to-earnings (P/E) ratio of 21.03, above its five-year median of 10.5. In comparison, the industry's forward earnings multiple is 23.72X. This indicates that although STRL's valuation is higher than its historical range, it remains slightly undervalued relative to the industry average.
Image Source: Zacks Investment Research
Again, STRL’s trailing 12-month return on equity of 25.1% is better than its industry average of 18.6%.
Image Source: Zacks Investment Research
Investment Thoughts
As the infrastructure sector expands, companies like Sterling are well-positioned to benefit, given their strong industry reputation and extensive experience with leading firms. The current data center capacity meets only a small portion of the demand for artificial intelligence and other emerging technologies.
Sterling's 2024 guidance suggests a potential revenue increase of 12%, a 23% rise in net income, and a 16% improvement in EBITDA. While the company does not pay dividends, it invests significantly in organic growth, mergers and acquisitions, and share buybacks. The company’s operating cash flow has approximately doubled every two years. With favorable revenue and EBITDA projections for 2024, Sterling is a notable mid-cap stock with potential returns.
However, given its high valuation, downward estimate revisions, and macroeconomic risks from the high-interest rate environment, cautious investors might consider waiting for clearer signs of stabilization in Sterling’s performance and market conditions before making an investment in this Zacks Rank #3 stock.
Image: Bigstock
Pre-Q2 Earnings Review: To Buy or Not to Buy Sterling (STRL)?
Sterling Infrastructure, Inc. (STRL - Free Report) is scheduled to report second-quarter 2024 results on Aug 5, after the closing bell.
In the first quarter, Sterling’s revenues, though, missed the Zacks Consensus Estimate by 2.9% but grew 9% year over year despite challenging weather. The company achieved a record gross margin of 17.5% and delivered earnings per share (EPS) of $1.00 (beating the consensus mark by 22%). It ended the quarter with a backlog exceeding $2.35 billion, up 45% year over year, and secured awards worth $642 million, reflecting strong demand in the data center and aviation markets. Cash flow from operations was $50 million.
Segment-wise, E-Infrastructure's 294 basis point margin expansion, Transportation Solutions' 34% revenue growth, and Building Solutions' 23% revenue increase were notable. Sterling raised its 2024 net income and EPS guidance, anticipating a strong year with 12% revenue growth and 16% EBITDA improvement.
Sterling, a premier U.S. service provider specializing in transportation, civil construction, and e-infrastructure solutions, has an impressive track record of surpassing earnings expectations, exceeding the consensus mark in each of the last four quarters. The average surprise over this period is 22.3%, as shown in the chart below.
Image Source: Zacks Investment Research
Trend in Estimate Revision
The Zacks Consensus Estimate for the second-quarter EPS has decreased to $1.43 from $1.47 over the past 30 days. The estimated figure indicates a 12.6% increase from the year-ago EPS of $1.27. Also, the consensus mark for revenues is $553.7 million, indicating 6% year-over-year growth.
Image Source: Zacks Investment Research
What Our Model Indicates
Our proven model does not predict an earnings beat for STRL this time around. The company possesses the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. This is not the case here.
Earnings ESP: STRL has an Earnings ESP of -3.16%. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Influencing Q2 Performance
Sterling is poised for growth in the second quarter of 2024, driven by long-term artificial intelligence (AI) trends. The company continues to expand across various sectors, including data centers and aviation markets, benefiting from a strategic shift toward large, mission-critical projects.
Segment-wise, E-Infrastructure, STRL's largest and fastest-growing segment, accounted for 42% of first-quarter 2024 revenues. Its customers include Amazon.com, Inc. (AMZN - Free Report) , Meta Platforms, Inc. (META - Free Report) , Walmart Inc. (WMT - Free Report) and Hyundai Motor Group. It is set to benefit from multi-year capital deployment in data centers, advanced manufacturing, and industrial sectors. Enhanced supply chain dynamics and a focus on large-scale, mission-critical projects will boost sales and margins. Data centers, now 40% of STRL’s E-Infrastructure backlog, play a crucial role in future growth, driven by the demand for AI technology advancements.
Transportation Solutions segment (which accounted for 34% of total first-quarter 2024 revenues) is expected to benefit from strong broad-based demand and margin growth across its entire geographic footprint. The segment is expected to benefit from robust state and local funding, the Infrastructure Bill's allocation of $643 billion for transportation programs (including $284 billion in incremental funding), and a $25 billion investment in airports over five years.
Sterling’s Building Solutions segment (which accounted for 24% of total first-quarter 2024 revenues) is its second-highest-margin segment, focusing on concrete foundations for residential and commercial projects. Operating in high-growth markets like Dallas, Houston, and Phoenix, this segment benefits from a quick-turn, asset-light business model, leading to fast cash cycles and high returns on invested capital.
Acquisitions have significantly contributed to STRL's growth by expanding its operations and boosting revenues. Strategic investments for profitability and efficient service execution, along with accretive buyouts, are anticipated to drive substantial second-quarter growth. Additionally, a reduced income tax rate and lower net interest expenses for the rest of the year are expected to enhance profitability.
Price Performance & Valuation
STRL’s stock has exhibited an upward movement in the year-to-date period. The stock has gained 32.3% compared with the industry’s rise of 25.1% in the same time frame.
YTD Price Performance
Image Source: Zacks Investment Research
Let's assess the value STRL offers to investors at its current levels.
Currently, STRL is trading at a forward 12-month price-to-earnings (P/E) ratio of 21.03, above its five-year median of 10.5. In comparison, the industry's forward earnings multiple is 23.72X. This indicates that although STRL's valuation is higher than its historical range, it remains slightly undervalued relative to the industry average.
Image Source: Zacks Investment Research
Again, STRL’s trailing 12-month return on equity of 25.1% is better than its industry average of 18.6%.
Image Source: Zacks Investment Research
Investment Thoughts
As the infrastructure sector expands, companies like Sterling are well-positioned to benefit, given their strong industry reputation and extensive experience with leading firms. The current data center capacity meets only a small portion of the demand for artificial intelligence and other emerging technologies.
Sterling's 2024 guidance suggests a potential revenue increase of 12%, a 23% rise in net income, and a 16% improvement in EBITDA. While the company does not pay dividends, it invests significantly in organic growth, mergers and acquisitions, and share buybacks. The company’s operating cash flow has approximately doubled every two years. With favorable revenue and EBITDA projections for 2024, Sterling is a notable mid-cap stock with potential returns.
However, given its high valuation, downward estimate revisions, and macroeconomic risks from the high-interest rate environment, cautious investors might consider waiting for clearer signs of stabilization in Sterling’s performance and market conditions before making an investment in this Zacks Rank #3 stock.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.