News

Sterling Infrastructure, Inc. STRL is scheduled to report third-quarter 2024 results on Nov. 6, after the closing bell.

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In the last reported quarter, STRL delivered solid results, with earnings and revenues came in ahead of the Zacks Consensus Estimate by 16.8% and 5.3%, respectively.

The company registered an 11.7% revenue growth and a 31.5% increase in earnings per share (EPS), driven by a diversified portfolio and a focus on margin expansion. Gross margins were a record 19.3%, and the company ended the quarter with a $2.45 billion backlog, up 2.2% year over year.

With these solid results and a strong backlog, Sterling raised its 2024 guidance, expecting 11% revenue growth, 28% net income growth, and 18% EBITDA growth for the year.

Sterling, a premier U.S. service provider specializing in transportation, civil construction, and e-infrastructure solutions, has an impressive track record of surpassing earnings expectations, exceeding the consensus mark in each of the last four quarters. The average surprise over this period is 17.4%, as shown in the chart below.

Image Source: Zacks Investment Research

How Are Estimates Placed for STRL?

The Zacks Consensus Estimate for the third-quarter EPS has remained unchanged at $1.68 over the past 60 days. The estimated figure indicates double-digit growth from the year-ago reported figure. The consensus mark for revenues is $599.9 million, indicating 7.1% year-over-year growth.

Image Source: Zacks Investment Research

What the Zacks Model Unveils for Sterling

Our proven model does not predict an earnings beat for Sterling for the quarter to be reported. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below.

Earnings ESP: STRL has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The company currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors Influencing Sterling’s Q3 Performance

Sterling is poised for growth in the third quarter of 2024, driven by long-term artificial intelligence (AI) trends, a diversified portfolio and a focus on margin expansion. The company continues to expand across various sectors, including data centers and aviation markets, benefiting from a strategic shift toward large, mission-critical projects.

Segment-wise, E-Infrastructure, STRL's largest and fastest-growing segment, accounted for 41% of second-quarter 2024 revenues. Its customers include Amazon.com, Inc. AMZN, Meta Platforms, Inc. META, Walmart Inc. WMT and Hyundai Motor Group. It is set to benefit from multi-year capital deployment in data centers, advanced manufacturing, and industrial sectors. Enhanced supply chain dynamics and a focus on large-scale, mission-critical projects will boost sales and margins. Data centers, now 40% of STRL’s E-Infrastructure backlog, play a crucial role in future growth, driven by the demand for AI technology advancements.

Transportation Solutions segment (which accounted for 40% of total second-quarter 2024 revenues) is expected to benefit from strong broad-based demand and margin growth across its entire geographic footprint. The segment is expected to have benefited from robust state and local funding, the Infrastructure Bill's allocation of $643 billion for transportation programs (including $284 billion in incremental funding), and a $25 billion investment in airports over five years.

Sterling’s Building Solutions segment (which accounted for 19% of total second-quarter 2024 revenues) is focusing on concrete foundations for residential and commercial projects. Operating in high-growth markets like Dallas, Houston, and Phoenix, this segment benefits from a quick-turn, asset-light business model, leading to fast cash cycles and high returns on invested capital. However, challenges such as affordability and land availability could temper short-term growth.

Acquisitions have significantly contributed to STRL's growth by expanding its operations and boosting revenues. Strategic investments for profitability and efficient service execution, along with accretive buyouts, are anticipated to have driven substantial third-quarter growth. Additionally, a reduced income tax rate and lower net interest expenses for the rest of the year are expected to have enhanced profitability.

STRL Stock’s Price Performance & Valuation

STRL stock has exhibited an upward movement in the year-to-date period and outperformed the Zacks Engineering - R and D Services industry.

STRL’s YTD Price Performance

Image Source: Zacks Investment Research

Let's assess the value STRL offers to investors at its current levels.

Presently, STRL is trading at a premium compared to the industry average, as shown in the chart below.

Image Source: Zacks Investment Research

Again, STRL’s trailing 12-month return on equity is better than its industry average.

Image Source: Zacks Investment Research

Investment Thoughts: Buy, Sell or Hold STRL Stock?

As the infrastructure sector continues to grow, Sterling stands to benefit significantly due to its strong industry reputation and extensive experience with top-tier clients. The current capacity for data centers falls far short of meeting the rising demand driven by artificial intelligence and other emerging technologies.

Sterling’s 2024 guidance midpoint suggests an 11% increase in revenues, 28% growth in net income, and an 18% rise in EBITDA. While the company does not issue dividends, it reinvests heavily in organic growth, mergers and acquisitions, and share repurchases. Its operating cash flow has roughly doubled every two years, with revenue and EPS showing impressive growth. EPS has achieved a 38% compound annual growth rate from 2019 to 2023. With favorable revenue and EBITDA projections for 2024, Sterling stands out as a promising mid-cap stock with attractive potential returns.

However, due to its high valuation, muted upward revisions in estimates, and cautious sentiment, investors may wish to wait for clearer signs of performance stability and favorable market conditions, particularly as the upcoming elections approach, before considering an investment.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.