Sterling Infrastructure, Inc. STRL stock is trading at a premium compared with the Zacks Engineering - R and D Services industry. With a forward 12-month Price/Earnings (P/E) ratio of 25.76X, it is above the industry’s average of 23.81X and a five-year median of 10.65X.
In comparison, its peers, Primoris Services Corporation PRIM, Granite Construction Incorporated GVA and Dycom Industries, Inc. DY, are trading cheaper at 15.89X, 14.82X and 21.91X, respectively.
While some investors may view this as a red flag, others might see it as a sign of the market’s confidence in Sterling’s growth potential. To assess whether the valuation is justified, we should consider Sterling’s growth prospects and the industry’s long-term prospects.
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Looking at Sterling’s share price performance, STRL stock has climbed 74.4% year to date (YTD), faring better than the industry’s 46% rise. STRL is trading above its 50-day and 200-day moving averages, indicating solid upward momentum. Now, let’s look closely at the factors driving Sterling and assess whether its high price and valuation are justified based on growth prospects or not.
STRL’s YTD Price Performance
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STRL Trades Above 50-Day & 200-Day SMA
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Factors Acting in Favor of Sterling
Sterling is seeing robust demand, especially in its Transportation and E-Infrastructure sectors, driven by federal infrastructure funding and the reshoring of manufacturing. With large transportation and data center projects, Sterling benefits from a pipeline of high-margin contracts. Growing reliance on cloud computing, AI, and technology advancements fuels demand for data centers, now comprising more than 40% of the company's E-Infrastructure backlog.
Also, Sterling's transportation revenues rose 45.6% year over year in the first half of 2024, aided by the 2021 bipartisan infrastructure bill. High bidding activity and ongoing federal funding boost growth prospects in highways, bridges, and critical infrastructure. Overall, Sterling has posted consistent revenue growth in recent years, driven by strong demand across its key segments, as you can see below.
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Sterling's project backlog, a key strength, stood at $2.1 billion as of the second quarter of 2024 — a 21% increase from the previous year. The E-Infrastructure backlog grew 7%, driven by data centers as AI and cloud computing demand surge. Additionally, with a high-probability project pipeline exceeding $500 million, Sterling's backlog is well-positioned for growth through 2026.
Sterling’s shift to high-margin, mission-critical projects, including data centers, has boosted operating income by 23.7% in the first half of 2024. E-Infrastructure margins reached 21.4% in the second quarter, underscoring Sterling's strategic emphasis on profitability.
Sterling maintains a healthy balance sheet. As of the second quarter of 2024-end, the company's balance sheet reflects a modest level of debt, consisting of $330.3 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 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 dividends, it allocates substantial resources to organic growth initiatives, mergers and acquisitions (M&A), and share buybacks.
STRL Stock Returns Higher Than the Industry
STRL’s trailing 12-month return on equity of 25.6% is better than its industry average. This depicts the company is more efficient at generating profits from its shareholders' investments than its competitors.
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Muted Estimates Revision Trend for STRL
Analysts have maintained their earnings estimates for 2024 and 2025 over the past 60 days, which limits the upside potential of the stock. Again, although the estimated figure indicates a solid double-digit growth for 2024, it decelerates in 2025, as shown in the chart below, which is concerning.
For a company trading at such a high valuation, this slowdown in growth is concerning. It suggests that the current valuation may not be justified unless growth picks up again.
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Investment Conclusion: Buy, Sell, or Hold?
Given Sterling’s impressive YTD share price performance and strong ROE relative to the industry, the stock has demonstrated itself as a solid performer. However, the deceleration in EPS growth from 2024 to 2025 raises concerns about the sustainability of its current P/E multiple.
For growth-oriented investors, the reduced EPS growth outlook may suggest holding off on new purchases until more visibility is available on future earnings trends. Those already holding Sterling shares might consider maintaining their positions, as the stock still benefits from a competitive edge and sector tailwinds. However, if growth continues to decelerate, profit-taking could be prudent. STRL currently has a Growth Score of A.
While Sterling's growth prospects are promising, the stock’s high P/E ratio suggests the market has high expectations for its performance. Any setbacks, such as delays in infrastructure spending or cost inflation, could affect Sterling’s growth trajectory and impact investor sentiment.
In summary, at a P/E multiple of 25.76x, current stakeholders are advised to maintain their position in this Zacks Rank #3 (Hold) stock. This allows time to observe its upcoming performance, especially with the EPS growth slowdown and valuation risks in mind. However, long-term growth catalysts in infrastructure could provide an upside if the company can capitalize on these opportunities effectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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