Sterling Infrastructure, Inc. STRL, a mid-cap company, in the Zacks Engineering - R and D Services industry, has caught the attention of Wall Street with an impressive 67.2% surge in its stock price over the past three months.
This rally has outpaced the industry, the broader Zacks Construction sector and the S&P 500 respectively, leading many investors to question whether the stock is still a good buy or if the rally has run its course.
Sterling, a premier U.S. service provider specializing in transportation, civil construction, and e-infrastructure solutions, is leveraging favorable secular trends in North America's expanding infrastructure market, fueled by increased government funding and rising private sector investments. STRL's E-Infrastructure Solutions segment, which emphasizes data centers and advanced manufacturing projects, has emerged as its largest revenue driver, delivering substantial improvements in operating margins.
Sterling Stock 3-Month Share Performance
Image Source: Zacks Investment Research
Here’s a closer look at the factors driving this performance and what the future might hold for Sterling stock.
E-Infrastructure: A Pillar of Growth for Sterling
Sterling Infrastructure’s E-Infrastructure segment (accounted for 45% of total third-quarter 2024 revenues) has become its most critical growth driver, supported by surging demand for data centers. This demand, driven by advancements in artificial intelligence and other technologies, led to a 90% year-over-year increase in e-infrastructure revenues during the third quarter of 2024. Large, mission-critical projects have significantly boosted operating margins, which expanded by more than 1,100 basis points (bps) to 25.8% for the segment. More than 50% of the e-infrastructure backlog now consists of data center projects, positioning the company to meet the growing need for digital infrastructure.
Sterling has also been strategically expanding into new regions like the Rocky Mountains, adding to its pipeline of high-probability future work. With multi-year visibility into new phases of ongoing projects, the e-infrastructure segment is expected to remain a cornerstone of Sterling's success.
STRL’s Solid Backlog Level
After delivering record earnings results in 2023, STRL had a great year of 2024 so far. Demand trends across all its end markets remain strong. The company ended the third quarter with a combined backlog of $2.37 billion, given its shift toward large, multi-phase projects in both transportation and e-infrastructure.
Sterling’s Transportation Solutions: Sustained Federal Support
The transportation segment (which accounted for 38% of third-quarter total revenues) has also played a key role in Sterling’s growth, benefiting from robust federal funding initiatives. Revenues in this segment increased 33.8% in the first nine months of 2024, with an operating margin of 6.9% (up 40 bps year over year), reflecting favorable market conditions and a solid backlog of $1.4 billion.
Federal infrastructure programs, particularly the Infrastructure Investment and Jobs Act, have provided a tailwind, enabling Sterling to secure multi-phase, design-build highway projects. These projects not only contribute to near-term revenues but also provide extended visibility into 2025 and beyond. By focusing on high-margin opportunities, Sterling has successfully positioned itself to capitalize on a historically strong market environment for transportation infrastructure.
Sterling’s Cash Flow and Financial Flexibility
Sterling’s robust cash flow generation is another driving factor, enabling the company to fund strategic initiatives and strengthen its financial position. Operating cash flow reached $322.8 million for the first nine months of 2024. This financial strength allows Sterling to pursue acquisitions that align with its strategic focus, particularly in e-infrastructure. The company also remains committed to shareholder returns through opportunistic share repurchases, having bought back $50.6 million worth of shares year to date. This financial flexibility positions Sterling to act decisively on growth opportunities while maintaining a strong balance sheet.
As of the third quarter of 2024-end, the company's balance sheet reflects a modest level of debt, consisting of $324 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 $648.1 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 Debt/EBITDA Coverage Ratio of 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.
STRL Stock Returns Higher Than the Industry
STRL’s trailing 12-month return on equity is better than its industry average, as shown in the chart below. This depicts the company is more efficient at generating profits from its shareholders' investments than its competitors.
Image Source: Zacks Investment Research
STRL Stock Valuation: A Premium Worth Paying?
STRL’s stock is currently slightly overvalued compared to its industry, as shown in the chart below.
However, the stock is trading lower than its peer group company like Construction Partners, Inc. ROAD but higher than Comfort Systems USA, Inc. FIX and Dycom Industries, Inc. DY. ROAD, DY and FIX are trading with forward 12-month P/E multiples of 50.32, 29.87 and 20.24, respectively.
Image Source: Zacks Investment Research
STRL Stock’s Estimate Movement Trending Upward
Despite premium valuation, analysts are showing confidence in the stock, as indicated below by recent upward revisions in EPS estimates for 2024 and 2025, respectively. The estimated figures for 2024 and 2025 indicate 33.3% and 8.1% year-over-year growth.
Image Source: Zacks Investment Research
How to Play STRL Stock?
Despite potential risks from economic cycles, supply chain issues, and regulatory hurdles, Sterling’s stellar stock performance is backed by robust fundamentals, including its leadership in the fast-growing e-infrastructure segment and stable contributions from transportation. With a record backlog, strong cash flows, and strategic expansion into high-margin opportunities, the company is well-positioned to continue capitalizing on favorable infrastructure trends.
That said, the stock’s premium valuation could limit near-term upside, making it more suitable for long-term investors who believe in the company’s ability to execute its growth strategy.
As a Zacks Rank #1 (Strong Buy) stock, Sterling remains an attractive investment and still offers a compelling investment opportunity for those looking to benefit from the long-term growth catalysts in infrastructure. You can see the complete list of today’s Zacks #1 Rank stocks here.
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