We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Sterling's Stock Rallies 44% in a Year: Good Time to Buy STRL?
Read MoreHide Full Article
Strategically seeking to be the leading infrastructure service provider in the United States, Sterling Infrastructure, Inc. (STRL - Free Report) is currently riding high on increased federal funding. Its shares have soared 44% in the past year, outpacing the 38.2% gain in the Zacks Engineering - R and D Services industry.
Image Source: Zacks Investment Research
Additionally, STRL shares have outperformed the Zacks Construction sector and S&P 500, which has increased 33.5% and 24.4%, respectively, in the past year. STRL stock also outpaced its peers like Eagle Materials Inc. (EXP - Free Report) , Great Lakes Dredge & Dock Corporation (GLDD - Free Report) and Summit Materials, Inc. (SUM - Free Report) , which surged 35.3%, 13.8% and 5.9%, respectively, in a year.
Sterling, with a market cap of $3.22 billion, offers transportation, civil construction, and e-infrastructure solutions. The company is capitalizing on long-term artificial intelligence (AI) trends, driving sustained growth across sectors like data centers and aviation. This strategic focus on large, mission-critical projects has led to a significant increase in its backlog, reflecting strong demand for its infrastructure solutions.
STRL stock is currently trading above its 50-day SMA. In fact, the 50-day SMA continues to read higher than the 200-day SMA, signaling a bullish trend. This technical strength highlights positive market sentiment and confidence in STRL's financial stability and prospects.
Image Source: Zacks Investment Research
Factors Solidifying Sterling's Stock Rally
Pure Play Infrastructure Service Provider: Since 2016, STRL focused mainly on building and transforming its business with a strategic vision to enhance bid discipline and reduce project losses. To that note, it has worked strongly on 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, which typically yield gross margins of 7-8%. Since implementing this strategy, STRL has increased the gross margin to 11.3% as of Dec. 31, 2023.
STRL anticipates further margin improvements as it continues executing this strategy. STRL also strategized to shift its project focus from low-bid heavy highway projects to higher-margin alternatives like airports, commercial ventures, and piling and shoring.
Apart from this, STRL seeks growth through acquisitions, focusing on companies with gross margins of 15% or higher. This strategy is designed to diversify its products, expand its services, and increase its customer base, thereby boosting market competitiveness. Since 2016, STRL has completed six acquisitions and intends to continue pursuing strategic growth opportunities in the future.
E-Infrastructure Segment, a Boon: STRL’s largest and most profitable segment, E-Infrastructure (contributing more than 40% of total revenues), helped it achieve double-digit revenue growth in the past years. Although the segment’s top line fell in the past two quarters, it generated 18.5% of operating margins, expanding 400 basis points year over year. This growth reflects improved supply chain dynamics and a strategic shift toward large-scale, mission-critical projects.
STRL anticipates continued strong margins of nearing 20% in 2024 and an improvement in the top line on its current backlog, primarily driven by the data center market's demand for AI technology advancements. Data center-related revenues increased more than 100% in the second quarter and now constitute 40% of STRL’s E-Infrastructure backlog, highlighting their pivotal role in driving future growth.
Impressive Backlog Level & 2024 Outlook: After delivering solid second-quarter 2024 results, STRL ended June 2024 with a combined backlog of $2.45 billion, which is up 2.2% from the June 2023-end. Demand trends across all its end markets remain strong. The company raised its 2024 guidance, given strong first-half results and backlog position.
The company now expects revenues of $2.150-$2.225 billion, up from $2,125-$2,215 expected earlier. Gross margin is now expected within 18.5-19% compared with 17.5% expected earlier. Net income is now likely to be in the $175-$180 million range, up from the $160-$170 projected earlier.
Adjusted earnings per share (EPS) is now likely to be in the range of $5.60-$5.75 compared with $5.00-$5.30 prior projection. EBITDA is now expected to be between $285 million and $300 million compared with $285-$300 million expected earlier.
The midpoint of the new 2024 guidance represents an 11% revenue increment, 28% net income improvement and 18% EBITDA growth.
Solid Liquidity Profile: Sterling continues to enhance flexibility and furnishes capital for future growth investments. The company's operating cash flow has nearly doubled approximately every two years. This trend is expected to continue in the future.
As of the second-quarter end, the company's balance sheet reflects a modest level of debt, consisting of $330 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 $540 million, surpassing its total debt. Scheduled repayments on the term loan amount to $26.3 million in both 2024 and 2025 and $6.6 million in 2026. With an EBITDA Debt Coverage Ratio of 1.1x, the company maintains a conservative leverage profile.
STRL expects to pursue strategic uses of its surplus liquidity in strategic acquisitions, investing in capital equipment and managing leverage.
STRL's Estimate Movement & Valuation
The Zacks Consensus Estimate for STRL’s 2024 EPS has moved up to $5.66 from $5.25 over the past 30 days. This depicts that there is solid upside potential for the stock. The estimated figure indicates 26.6% year-over-year growth for 2024.
STRL delivered a trailing four-quarter earnings surprise of 17.4%, on average. The company’s 2024 revenues are also likely to rise 9.7% year over year. Impressively, STRL currently flaunts a VGM Score of A.
Image Source: Zacks Investment Research
STRL’s stock is currently slightly undervalued compared to its industry, as shown in the chart below.
Image Source: Zacks Investment Research
STRL is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 19.76, which is below its industry’s 24.03. This low P/E ratio could indicate that the stock is undervalued in its industry, suggesting that STRL has space for future growth.
Image Source: Zacks Investment Research
Again, STRL’s trailing 12-month return on equity (ROE) of 25.6% is better than its industry average of 19.2%.
Potential Risks for STRL Stock
The above-mentioned factors are strongly in favor of Sterling’s stock growth, but some potential risks are worth considering while making an investment strategy.
STRL remains vigilant regarding macroeconomic challenges, including rising interest rates, supply chain disruptions, energy price volatility, global conflicts, and the potential effects of the upcoming U.S. presidential election on decision-making processes.
Final Thoughts
As the infrastructure sector continues to grow, companies such as Sterling are poised to capitalize on this trend, mainly 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.
Although the macroeconomic risk associated with the high-interest rate environment cautions investors, upward revisions in earnings estimates reinforce Sterling’s Zacks Rank #1 (Strong Buy). This makes STRL an attractive addition to investors' portfolios at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Sterling's Stock Rallies 44% in a Year: Good Time to Buy STRL?
Strategically seeking to be the leading infrastructure service provider in the United States, Sterling Infrastructure, Inc. (STRL - Free Report) is currently riding high on increased federal funding. Its shares have soared 44% in the past year, outpacing the 38.2% gain in the Zacks Engineering - R and D Services industry.
Image Source: Zacks Investment Research
Additionally, STRL shares have outperformed the Zacks Construction sector and S&P 500, which has increased 33.5% and 24.4%, respectively, in the past year. STRL stock also outpaced its peers like Eagle Materials Inc. (EXP - Free Report) , Great Lakes Dredge & Dock Corporation (GLDD - Free Report) and Summit Materials, Inc. (SUM - Free Report) , which surged 35.3%, 13.8% and 5.9%, respectively, in a year.
Sterling, with a market cap of $3.22 billion, offers transportation, civil construction, and e-infrastructure solutions. The company is capitalizing on long-term artificial intelligence (AI) trends, driving sustained growth across sectors like data centers and aviation. This strategic focus on large, mission-critical projects has led to a significant increase in its backlog, reflecting strong demand for its infrastructure solutions.
Technical Indicators Substantiating STRL Stock's Growth
STRL stock is currently trading above its 50-day SMA. In fact, the 50-day SMA continues to read higher than the 200-day SMA, signaling a bullish trend. This technical strength highlights positive market sentiment and confidence in STRL's financial stability and prospects.
Image Source: Zacks Investment Research
Factors Solidifying Sterling's Stock Rally
Pure Play Infrastructure Service Provider: Since 2016, STRL focused mainly on building and transforming its business with a strategic vision to enhance bid discipline and reduce project losses. To that note, it has worked strongly on 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, which typically yield gross margins of 7-8%. Since implementing this strategy, STRL has increased the gross margin to 11.3% as of Dec. 31, 2023.
STRL anticipates further margin improvements as it continues executing this strategy. STRL also strategized to shift its project focus from low-bid heavy highway projects to higher-margin alternatives like airports, commercial ventures, and piling and shoring.
Image Source: Q2 2024 Earnings Release PP Presentation
Apart from this, STRL seeks growth through acquisitions, focusing on companies with gross margins of 15% or higher. This strategy is designed to diversify its products, expand its services, and increase its customer base, thereby boosting market competitiveness. Since 2016, STRL has completed six acquisitions and intends to continue pursuing strategic growth opportunities in the future.
E-Infrastructure Segment, a Boon: STRL’s largest and most profitable segment, E-Infrastructure (contributing more than 40% of total revenues), helped it achieve double-digit revenue growth in the past years. Although the segment’s top line fell in the past two quarters, it generated 18.5% of operating margins, expanding 400 basis points year over year. This growth reflects improved supply chain dynamics and a strategic shift toward large-scale, mission-critical projects.
STRL anticipates continued strong margins of nearing 20% in 2024 and an improvement in the top line on its current backlog, primarily driven by the data center market's demand for AI technology advancements. Data center-related revenues increased more than 100% in the second quarter and now constitute 40% of STRL’s E-Infrastructure backlog, highlighting their pivotal role in driving future growth.
Impressive Backlog Level & 2024 Outlook: After delivering solid second-quarter 2024 results, STRL ended June 2024 with a combined backlog of $2.45 billion, which is up 2.2% from the June 2023-end. Demand trends across all its end markets remain strong. The company raised its 2024 guidance, given strong first-half results and backlog position.
The company now expects revenues of $2.150-$2.225 billion, up from $2,125-$2,215 expected earlier. Gross margin is now expected within 18.5-19% compared with 17.5% expected earlier. Net income is now likely to be in the $175-$180 million range, up from the $160-$170 projected earlier.
Adjusted earnings per share (EPS) is now likely to be in the range of $5.60-$5.75 compared with $5.00-$5.30 prior projection. EBITDA is now expected to be between $285 million and $300 million compared with $285-$300 million expected earlier.
The midpoint of the new 2024 guidance represents an 11% revenue increment, 28% net income improvement and 18% EBITDA growth.
Solid Liquidity Profile: Sterling continues to enhance flexibility and furnishes capital for future growth investments. The company's operating cash flow has nearly doubled approximately every two years. This trend is expected to continue in the future.
As of the second-quarter end, the company's balance sheet reflects a modest level of debt, consisting of $330 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 $540 million, surpassing its total debt. Scheduled repayments on the term loan amount to $26.3 million in both 2024 and 2025 and $6.6 million in 2026. With an EBITDA Debt Coverage Ratio of 1.1x, the company maintains a conservative leverage profile.
STRL expects to pursue strategic uses of its surplus liquidity in strategic acquisitions, investing in capital equipment and managing leverage.
STRL's Estimate Movement & Valuation
The Zacks Consensus Estimate for STRL’s 2024 EPS has moved up to $5.66 from $5.25 over the past 30 days. This depicts that there is solid upside potential for the stock. The estimated figure indicates 26.6% year-over-year growth for 2024.
STRL delivered a trailing four-quarter earnings surprise of 17.4%, on average. The company’s 2024 revenues are also likely to rise 9.7% year over year. Impressively, STRL currently flaunts a VGM Score of A.
Image Source: Zacks Investment Research
STRL’s stock is currently slightly undervalued compared to its industry, as shown in the chart below.
Image Source: Zacks Investment Research
STRL is currently trading at a forward 12-month price-to-earnings (P/E) ratio of 19.76, which is below its industry’s 24.03. This low P/E ratio could indicate that the stock is undervalued in its industry, suggesting that STRL has space for future growth.
Image Source: Zacks Investment Research
Again, STRL’s trailing 12-month return on equity (ROE) of 25.6% is better than its industry average of 19.2%.
Potential Risks for STRL Stock
The above-mentioned factors are strongly in favor of Sterling’s stock growth, but some potential risks are worth considering while making an investment strategy.
STRL remains vigilant regarding macroeconomic challenges, including rising interest rates, supply chain disruptions, energy price volatility, global conflicts, and the potential effects of the upcoming U.S. presidential election on decision-making processes.
Final Thoughts
As the infrastructure sector continues to grow, companies such as Sterling are poised to capitalize on this trend, mainly 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.
Although the macroeconomic risk associated with the high-interest rate environment cautions investors, upward revisions in earnings estimates reinforce Sterling’s Zacks Rank #1 (Strong Buy). This makes STRL an attractive addition to investors' portfolios at present. You can see the complete list of today’s Zacks #1 Rank stocks here.