Sterling Infrastructure, Inc. (STRL – Free Report) has seen a sharp decline, dipping 18% in the past month, compared with the Zacks Engineering – R and D Services industry’s 6.8% decline. This significant pullback contrasts with the broader market trends, as the Zacks Construction sector edged up by 0.2% and the Zacks S&P 500 Composite gained 3.8% during the same period.
Even within its industry, STRL has underperformed, lagging behind competitors like Dycom Industries, Inc. (DY – Free Report) , which gained 4.7% over the same timeframe.
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Sterling Stock 1-Month Share Performance
Image Source: Zacks Investment Research
Adding to investor concerns, STRL is trading below its 50-day and 200-day simple moving averages (SMAs), indicating potential bearish momentum. Given the stock’s downturn, investors are questioning whether Sterling presents a buying opportunity or if further downside risks remain.
Image Source: Zacks Investment Research
Challenges Holding Back Sterling’s Growth
Despite strong quarterly performances, Sterling faces multiple challenges that could impact its near-term growth. One of its key segments, building solutions, saw a 10% drop in revenue and a 12% decline in operating income in the third quarter of 2024. The primary issue is the slowdown in the Dallas residential market due to affordability concerns and high mortgage rates. Even though builders expect a rebound in 2025, the current softness in housing construction remains a headwind.
Meanwhile, after cutting rates by a cumulative 100 basis points between September and December 2024, Fed officials, including chair Jerome Powell, have recently voted unanimously to hold the benchmark interest rates unchanged at 4.25%-4.50%. As only two rate cuts are expected for 2025, prolonged higher interest rates could continue to suppress residential construction activity, which may negatively impact the company’s growth and margins in this sector.
Additionally, Sterling’s over-reliance on data centers poses risks. Data centers now make up more than half of the company’s e-infrastructure backlog. While this has fueled substantial earnings growth, any slowdown in AI-related infrastructure projects could hurt future revenues. Execution risks in large-scale projects further complicate Sterling’s outlook.
Valuation: Is STRL Overpriced?
Sterling’s valuation remains a concern. The stock is trading at a forward 12-month P/E ratio of 21.49—higher than the Zacks Engineering – R&D Services industry average of 19.1 and well above its three-year median of 15.1.
However, STRL is still priced lower than some of its industry peers, such as Construction Partners, Inc. (ROAD – Free Report) and Comfort Systems USA, Inc. (FIX – Free Report) , which trade at 37.66X and 23.45X, respectively.
While Sterling’s higher valuation reflects its growth potential, investors may hesitate to buy at these levels, especially given the recent price decline.
Sterling’s P/E Ratio (Forward 12-Month) vs. Industry
Image Source: Zacks Investment Research
Decoding Sterling’s Tailwinds
E-Infrastructure and Federal Support: One of Sterling’s strongest growth catalysts remains its E-Infrastructure segment, which accounted for 45% of total revenues in the third quarter of 2024. This segment surged 90% year over year due to rising demand for data centers, particularly from AI and cloud computing expansion. Operating margins expanded 1,100 basis points (bps) to 25.8%, reinforcing Sterling’s profitability.
Additionally, Sterling’s transportation segment, which made up 38% of total third-quarter revenues, has been growing steadily. Federal infrastructure funding, particularly through the Infrastructure Investment and Jobs Act, has bolstered demand for multi-phase highway projects. This segment reported a 33.8% increase in revenues in the first nine months of 2024, with an operating margin improvement of 40 bps to 6.9%.
Backlog Strength Supports Future Growth: Sterling’s backlog remains a strong indicator of future growth. As of the third quarter of 2024, the company had a combined backlog of $2.37 billion, driven by large-scale infrastructure projects. More than half of this backlog is tied to data center developments, providing visibility into sustained revenue streams.
Its transportation backlog also stands at $1.4 billion, reflecting the ongoing demand for highway expansion and public infrastructure projects. With long-term contracts and multi-phase projects, Sterling is well-positioned to sustain revenue growth despite short-term challenges.
Financial Flexibility: A Key Strength: Sterling’s financial position is another bright spot. The company generated $322.8 million in operating cash flow in the first nine months of 2024, providing ample resources to fund growth initiatives and share buybacks. Year to date, Sterling has repurchased $50.6 million worth of shares, signaling management’s confidence in the company’s long-term prospects.
Sterling maintains a conservative leverage profile, with $324 million in term loan borrowings and an untapped $75 million revolving credit facility. With a debt-to-EBITDA coverage ratio of 1x and a cash balance of $648.1 million, Sterling has strong financial flexibility to pursue expansion opportunities.
STRL’s EPS Estimates and Analyst Sentiment
Wall Street analysts remain optimistic about Sterling’s earnings potential. Over the past 30 days, earnings per share estimates for 2025 have been revised upward, as shown below, reflecting expected 8.1% year-over-year growth.
Image Source: Zacks Investment Research
Additionally, analysts have set an average price target of $191.50 per share, suggesting a 32.2% upside from its most recent closing price.
Sterling’s trailing 12-month return on equity of 27.52% also outpaces the industry average, indicating efficient capital utilization.
Conclusion: Is STRL Stock a Buy, Hold, or Sell?
Despite recent challenges, Sterling remains fundamentally strong. Its backlog, growth in e-infrastructure, and financial flexibility position it for long-term success. However, the stock’s recent decline, valuation concerns, and near-term headwinds in residential construction and data center dependency warrant caution.
Given these factors, Sterling currently holds a Zacks Rank #3 (Hold), meaning investors may want to wait for a better entry point rather than rushing to buy. For those already holding the stock, the long-term growth outlook, solid backlog, and financial stability suggest maintaining a position could be a wise decision. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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