Battered Sterling Stock Could Rally if Infrastructure Spending Plan Is Revived

Sterling Construction
iStock.com/Melpomenem

Sterling Construction May Be at a Near-Term Bottom

The Democrats took back the House in the U.S. midterm elections, and now the discussion is about what the shift in power could mean for the country’s agenda.

There is a sense that we could see some collaboration on issues common to both parties, such as healthcare, immigration, and infrastructure.

Do you remember when, during the presidential election campaign, Donald Trump talked up a massive infrastructure revolution that would eclipse $1.0 trillion?

The point is, both parties want to see the country’s crumbling infrastructure rebuilt. This includes highways, bridges, airports, railways, buildings, and other major projects.

Advertisement

But while we have yet to see a concrete and viable plan surface, there is hope that discussions will pick up. That said, given the massive national deficit and debt, it will not be easy.

If there is any progress, smaller companies like Sterling Construction Company, Inc. (NASDAQ:STRL) could benefit.

Sterling operates in diversified heavy civil construction projects: highways, roads, bridges, airfields, water ports, light rail, and wastewater/storm drainage systems.

STRL stock has been embattled, down 35.7% from its 52-week and record high of $18.90—and down 21% over the past three months.

A glance at the Sterling stock chart shows the stock initially rallying after the Trump win, breaking above $9.00 to its high in December 2017. The stock price has since gone back down, in the absence of any serious hope of a viable infrastructure plan.

strl stock chart

Chart courtesy of StockCharts.com

Sterling shares are testing support around $11.00, last encountered in April 2018. If that can hold, we could see the shares rally toward $14.00, $15.60, and $16.00–$18.00.

The risk-to-reward prospect looks intriguing, with an upside potential of 50%.

The Bull Case for STRL Stock

Sterling has increased its revenue in three of the past four years, including a strong 38.8% jump to $958.0 million in 2017. The compound annual growth rate (CAGR) during this time frame was 14.6%.

Fiscal Year

Revenue (Millions)

Growth

2013

$556.2
2014 $672.2

20.95

2015

$623.6 -7.2%
2016 $690.1

10.7%

2017

$958.0

38.8%

(Source: “Sterling Construction Co. Inc.” MarketWatch, last accessed November 9, 2018.)

There are some concerns about Sterling: the company’s revenue growth rate is expected to decline to 7.8% (to $1.0 billion) in 2018 and to 7.3% (to $1.1 billion) in 2019. (Source: “Sterling Construction Company, Inc. (STRL),” Yahoo! Finance, last accessed November 9, 2018.)

My view is that the growth rate is moderating after the sizzling growth of 2017, but Sterling could produce better growth if a federal infrastructure plan emerges.

In the meantime, Sterling has been generating positive earnings before interest, tax, depreciation, and amortization (EBITDA). Furthermore, the company turned a profit in 2017. The EBITDA and earnings grew at much higher rates than revenue in 2014, 2016, and 2017.

Fiscal Year

EBITDA (Millions)

Growth

2013

-$54.1
2014 $14.0

125.9%

2015

$3.6 -74.29%
2016 $21.3

491.1%

2017

$44.5

109%

(Source: MarketWatch, op cit.)

Fiscal Year

Diluted Earnings Per Share

Growth

2013

-$4.9
2014 -$0.5

89%

2015

-$2.0 -274.1%
2016 -$0.4

80.2%

2017

$0.4

207.5%

(Source: Ibid.)

For 2018, Sterling is estimated to more than double its earnings to $0.94 per diluted share. In 2019, it’s expected to rise to $1.26 per diluted share. The high estimate for 2019 is $1.38 per diluted share. (Source: Yahoo! Finance, op cit.)

Furthermore, the company has been generating positive free cash flow (FCF), which is something you want to see with an infrastructure company.

Fiscal Year

Free Cash Flow (Millions)

Growth

2013

-$36.5
2014 -$24.0

34.1%

2015

$0.88 103.7%
2016 $33.6

3,718.1%

2017

$13.6

-59.6%

(Source: MarketWatch, op cit.)

Analyst Take

Sterling stock is worth a look, trading at its current price levels wherein the risk-to-reward prospect looks favorable for a rally.

The stock has been attracting some insider buying, to the tune of a net 41,290 shares bought by insiders over the past six months. (Source: Yahoo! Finance, op cit.)

STRL stock trades at an attractive 9.7 times its consensus 2019 earnings per share and 8.8 times its high estimate. The price/earnings to growth ratio of 1.2 offers some value.