Sterling Construction (STRL) is an Investment in the Buildout of Datacenters for AI

Stock (Symbol)

Sterling Construction (STRL)

Stock Price

$146

Sector

Data is as of

Expected to Report

Company Description

Sterling Infrastructure, Inc. operates through a variety of subsidiaries, specializing in E-Infrastructure, Transportation and Building Solutions in the United States.

Its segments include E-Infrastructure Solutions, Transportation Solutions, and Building Solutions.

The E-Infrastructure Solutions segment is a provider of large-scale specialty site infrastructure improvement contracting services in the Southeastern, Northeastern and Mid-Atlantic United States. It serves large, blue-chip end users in the e-commerce, data center, distribution center, warehousing, energy sectors and more.

The Transportation Solutions segment is comprised of heavy highway, aviation, and rail, and relies heavily on federal and state infrastructure spending. The principal markets of this segment are Arizona, Colorado, Hawaii, Nevada, Texas, and Utah.

The Building Solutions segment is comprised of its residential and commercial businesses. It focuses on concrete construction of multifamily foundations. Source: Refinitiv

Sharek’s Take

Sterling Construction is a construction company that works with heavy machinery to tackle huge construction projects, like expanding highways and building water infrastructure. Sterling Construction is a heavy civil construction company founded in 1955 and based in Texas. The company’s building projects include roadways, airports, office and residential areas, highway rest stops, and schools. Although these projects are good for revenue, civil construction has low-profit margins. In 2016, management dedicated itself to growing high-margin projects and expanding into other markets. STRL has extended its services to building high-tech data centers, as well as e-commerce structures, including warehouses and distribution centers for clients such as Amazon, Facebook, Home Depot and FedEx. The move into other areas of construction has been excellent for profits, which jumped 69% in 2020, 48% in 2021, 55% in 2022, and 28% in 2023. Analysts estimate 28% growth in 2024.

Today, Sterling has three business segments:

1. E-Infrastructure Solutions
   • -7% revenue growth last qtr, 41% of total company sales.
   • Large-scale development for data centers, ecommerce, distribution centers, and power generation
   • E-infrastructure was the largest segment. Growth was driven by focus on large, mission-critical projects.
   • Data center revenue more than doubled and is now over 40% of the segment’s backlog.
2. Transportation Solutions
   • +54% revenue growth last qtr, 40% of total company sales.
   • Projects for highways, roads, bridges, and airports primarily in the Rocky Mountain states and Texas.
   • Transportations markets are the strongest they’ve been in company history.
   • Combined backlog reached $1.5 billion, a 5% increase from a year ago.
   • The company secured initial design work for several large highway projects.
3. Building Solutions
   • -2% revenue growth last qtr, 19% of total company sales.
   • Pours concrete foundations and parking structures for home builders in Texas and Arizona, primarily in the Dallas and Houston communities.
   • Residential concrete lab revenue dropped 7%, mainly due to heavy rainfall in Texas and limited available land for builders.
   • Shift towards residential slabs and plumbing improved operating margins, which expanded to 12.7% from 12.1% a year ago.

Sterling infrastructure has an Estimated Long Term Growth Rate of just 11% but profits have been growing at a much faster rate. That makes it tough for me to value the stock. This quarter, I think the stock is deserving of a 26 P/E which is $142 a share, around the current stock price. STRL does not pay a dividend, but does buy back stock using an opportunistic approach.  I have STRL on the radar and may add it to the Growth Portfolio.

One Year Chart

Qtrly profit growth has been excellent for a construction company. That’s due in part to higher profit margins.

The Est. LTG is just 11%. It seems like this company is growing profits around 20% right now.

The P/E of 26 is about where it should be.

Earnings Table

Last qtr’s backlog increased by 21% from the year ago period.

Annual Profit Estimates are up this quarter, and have been trending higher. Management sees a big pool of mega projects on the horizon including planned chip plants. In building solutions, business is set for growth over many years as Dallas, Houston, and Phoenix are expected to see population growth, driving demand for new homes.

Qtrly profit Estimates are for 36%, 1%, 2% and 5% profit growth the next 4 qtrs. Analysts think STRL revenue will grow 10% next quarter.

Fair Value

This company really pulled it together in 2020 as profits jumped 69% to record highs of $1.52 per share. STRL has been in a groove since.

But note this stock had a P/E of just 14 last year. That makes it tough for me to buy now that the P/E is 26.

My Fair Value is a P/E of 25, which is $142 a share. Also, the stock is at 2025’s Fair Value of $152. Note this table was done around a month ago. The stock is $154 today.

Bottom Line

Sterling Construction (STRL) has a pretty ten-year chart, but that hasn’t always been the case. What’s not shown here is between 2003 and 2005 the stock went from $2 to $25. That’s a big move in a short period of time. STRL set an all-time high of $33 in 2006, then trended lower until it sank to $2 in 2015 (shown here). Management’s decision to evolve into other areas of construction turned the stock around.

Sterling is rolling right now. But the stock’s valuation is high when compared to past years, and growth is expected to slow in the upcoming qtrs.

STRL is on the radar for the Growth Portfolio.

Power Rankings

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Aggressive Growth Portfolio

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Conservative Stock Portfolio

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