Sterling Infrastructure (NASDAQ:STRL) is a construction company that provides solutions for e-infrastructure, building, and transportation. That might not sound like a booming industry to be in, but the stock has surged 172% over the past 12 months. It’s not cheap at 24.63x forward earnings, but the company is being driven forward by tailwinds in areas like data centers and projects tied to electric vehicle infrastructure. That’s why I remain bullish on the stock.
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Sterling Infrastructure’s Backlog
Sterling Infrastructure shares popped after the company reported a strong set of results on May 6. Revenue for Q1 came in at $440.4 million, a 9.1% year-over-year increase and $18.65 million ahead of expectations. The company achieved a gross margin of 17.5%, up from 15.3% in the previous year. Also, net income for the quarter reached $31.0 million, or $1.00 per diluted share, marking a significant increase of 58% and 56%, respectively.
Sterling said it had cash and cash equivalents totaling $480.4 million as of March 31 and a contract backlog worth $2.35 billion. Sterling’s CEO, Joe Cutillo, said that results would have been even better if weather conditions in January and February had been better. “We ended the quarter with a backlog of $2.35 billion, which is up 45% from the first quarter of 2023,” Cutillo noted.
Moreover, Cutillo highlighted that Sterling won $642 million of new contracts during the first quarter, giving the company a strong book-to-burn ratio of 1.8x. This ratio simply tells us the value of business coming in versus the value of business completed during the period.
Moreover, management highlighted that the combined backlog — $2.42 billion as of March 31 — equated to “16 months of prospective backlog revenues.” In 2023, the comparable computation was approximately 12 months of backlog revenues.
This gives Sterling Infrastructure a remarkably strong pipeline and revenue visibility. With inflation falling, the company’s strong financial position is even more advantageous, as it can better manage costs and maintain margins.
Data Centers are Big Business for Sterling Infrastructure
Sterling engages in a wide range of construction projects, including highways, data centers, parking structures, and much more. However, the company’s recent performance has been driven by increased government spending on infrastructure, data centers, and the electrification agenda.
As highlighted in the earnings call, the data center market is the largest driver of new contracts, with customers rushing to build new capacity. Sterling currently has three “sizeable” data center projects, and data centers represent 40% of the company’s e-infrastructure backlog. Management suggested that new contract awards could pick up in the second quarter. Additionally, Cutillo pointed to a strong pipeline of large manufacturing projects tied to electric vehicles, batteries, and solar.
Sterling Infrastructure Stock Is a Little Pricy But Worth It
Sterling Infrastructure is trading at a premium to the S&P 500 (SPX) on a P/E basis, and that represents something of a concern. Construction companies tend to trade at discounts, given their cyclical nature. Also, Sterling also doesn’t pay a dividend at the moment. All of these factors would lead me to suggest that the stock is a little overvalued at 24.6x forward earnings.
However, Sterling offers more growth than most construction companies. Driven by these aforementioned tailwinds in data centers and electrification, earnings are expected to grow faster than the sector average. For example, earnings per share growth is expected to come in at 17.88%. Coupled with a very strong financial position and cash and cash equivalents totaling $480.4 million, I don’t think Sterling is overvalued.
I think it’s also important to note that Sterling Infrastructure has consecutive earnings beats going back to Q1 of 2021. That’s a really strong track record — one that gives me confidence in management’s cautious guidance and ability to find new efficiencies and business growth. Personally, I don’t see Sterling’s premium valuation as a red flag, but I understand that it’s trading closer to fair value today than it has been.
Is Sterling Infrastructure Stock a Buy, According to Analysts?
On TipRanks, STRL is rated a Hold based on one analyst rating assigned in the past three months. Sterling Infrastructure stock’s price target is $130.00, implying 2.8% upside potential.
The Bottom Line on Sterling Infrastructure Stock
Sterling Infrastructure is a little expensive for a conventional construction company. Trading at 24.6x forward earnings and with no dividend, I can see why some investors would be hesitant. However, while I appreciate that Sterling probably has less upside than it did a few months ago, there are several things that give me confidence.
Sterling has a strong order book and cash position, and it’s being driven forward by trends in data center development and the electrification agenda. Moreover, the company has an impressive track record of beating earnings expectations. I believe it’s a well-run firm with the capacity to continue to surprise positively.
