While profits are still in the red, this infrastructure company’s fortunes are looking up, with a revenue and earnings beat in its most recent quarter. The company posted revenues of $153.4 million with a loss of $0.09 per share, beating analysts’ estimates of $134 million in revenues and -$0.11 EPS.
Sterling Construction Company (STRL)
From Crisis and Opportunity
President Trump is determined to overhaul and modernize the nation’s infrastructure. He is drafting plans to build roads, bridges, railroads, and airports. They are talking about spending $1 trillion. Plans to pay for it include new gas taxes and privatization of assets.
Many states such as Utah, California, and Texas are already building infrastructure on the state level. Over 400 ballot measures funding transportation have passed in the last election cycle, totaling more than $50 billion countrywide. In one example, Las Vegas, NV voters approved $3 billion in gas taxes over 10 years to fund road expansion and safety projects.
That’s a nice tailwind for a small heavy-highway construction company.
One small company that will take advantage of this is the Sterling Construction Company (STRL). STRL has a market cap of $272 million and revenues in the $150mm range, and it is growing over 20% a year.
The firm works on state and local infrastructure projects, with 72% of its income coming from heavy highway and bridge construction.
The company is moving toward higher-margin business like design and airport/railway/port construction. Non-heavy highway now accounts for 25% of its backlog versus 10% in 2015. Its backlog now stands at $935 million.
Margins have climbed from 6% to over 8% over the past three years due to a more disciplined bidding process.
All its jobs are in western states with 60% coming from Texas, California, and Utah. Texas looks to increase infrastructure spending by 4.5 billion over the next two years. California just passed a $52 billion transportation bill with $5 billion going to highways. Utah raised gas taxes 20% and recently passed a $1 billion bond package for roads.
STRL is also undervalued. It trades at four times two-year estimated EBITDA, and less than eight times forward P/E. Price to sales is at 0.38. Its balance sheet is solid with $37 million in cash and only $4.3 million in debt.
Back in 2005 its share price went from $5 to over $30 in 18 months based on George Bush Jr.'s infrastructure spending plans. So, it can move.
The stock has doubled over the last year before pulling back.
This looks like a good entry point with support above $10. Once the next budget works its way through congress and infrastructure spending starts to gain prominence this company should be among the big movers.
Buy Sterling Construction Company (STRL). Put your stop-loss in at $7.85 with a two-year price target of $35.
Christian DeHaemer, Crisis and Opportunity, www.angelpub.com, 877-303-4529, May 26, 2017