Who are they?
Sterling Infrastructure is a construction company that builds transportation, buildings, and E-infrastructure. The last category is their recent focus and highest growth area. They launched their E-infrastructure segment in 2016. Before this the company focused on heavy highway projects. The E-infrastructure business is higher margins, less competitive, and faster growing. The heavy infrastructure business once made up 79% of revenue, now makes up only 11%.
Growth avenues
The company is leaning on its E-infrastructure business to lead its growth. This segment builds things such as data centers, e-commerce distribution centers, and warehousing. The company can also grow through acquisitions. The construction industry is highly fragmented and there are a lot of small, regional players, so there is potential for a lot of expansion. On their last 10K the company noted 3 acquisitions it made last year, along with one disposition of a partnership.
The company currently has an ROE of 25.55% and ROIC 13.32%. Both categories have seen expansion since 2016 and are above their 5 year averages.
Management
The CEO, Joseph Cutillo, has been in the position since early 2017 so he has overseen most of the transition in the business. He is estimated to own about 5% of the company stock, which means he does have an interest in the price going up.
Risk factors/Moat
Construction is a cyclical industry, and most contracts have multiple bidders. As a result the company does not appear to have a moat. The industry tends to have about an 18 month lag time to the general economy (This was cited in an interview with the CEO of another construction company). This means that even though Sterling is busy now, they could be looking at a downturn in a year or two as they catch up to the broad economy.
The company also missed their stated revenue goals for last year. They wanted to grow revenue 27%, but only achieved 12% growth. They did manage to beat their EPS targets by a wide margin though.
I also worry about their e-commerce warehouse division. Amazon has recently scaled back their plans for warehouse construction, which could mean there is a slowdown in the broad sector, at least in the short term.
The company also carries a lot of debt. They have about $490 million in outstanding debt and a market cap of $1.16 billion. Most of it is due in the next 3 years. This is not abnormal for its industry, which requires a lot of capital for machines, materials, etc.
Valuation
Sterling currently trades around 11x last years earnings, and 9x next years earnings. This is very low for their industry. Per finviz, they have the third lowest P/E in their industry. For comparison FIX is trading at 19x, with similar growth estimates. EME is also around 20x. It appears that Sterling is trading at a discount to its peers, and is thus possibly undervalued. EV/EBITDA is about 6x, again, very cheap.
The downside is that this stock, like most of its peers, has had a good run this year. Even after a recent pullback, it is up over 50% in the last 6 months. For comparison, FIX is up about 35% in the same period. So while the headline numbers are cheap, it is possible the stock is overdue for a correction. The 200 day average is around $29, and some price support around $30. I think that would be a more interesting time to look at this name.
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