Sterling Infrastructure, Inc. (STRL Quick QuoteSTRL - Free Report) is trading at a forward 12-month price-to-earnings (P/E) multiple of 26X, a 14.4% premium to the Zacks Engineering - R and D Services industry average of 22.73X. This valuation is above Sterling's five-year median of 10.82X, signaling that the stock is priced for growth.

Compared to its peers, STRL’s valuation sits below Construction Partners, Inc. (ROAD Quick QuoteROAD - Free Report) , 43.72X) but above Dycom Industries, Inc. (DY Quick QuoteDY - Free Report) , 18.29X) and near Comfort Systems USA, Inc. (FIX Quick QuoteFIX - Free Report) , 25.84X).
 

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While the premium valuation raises concerns, it reflects the market’s confidence in Sterling’s strong financial performance and growth prospects. The stock has surged 98.7% so far in 2024 and remains 14.1% below its 52-week high of $203.49 (reached on Nov. 26, 2024). This rally has outpaced the industry and the broader Zacks Construction sector, respectively. But does the company’s current valuation justify its growth story, or is the stock overpriced?

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Technical Indicators: Mixed Signals

Sterling’s stock is trading above its 200-day simple moving average (SMA), indicating solid long-term momentum. However, it is slightly below its 50-day SMA, reflecting near-term volatility.

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Growth Drivers Backing STRL’s Stellar Performance

Sterling’s E-Infrastructure segment has become the cornerstone of its growth, contributing 45% of third-quarter 2024 revenues. Revenue from this segment surged 90% year over year, bolstered by the increasing demand for data centers driven by advancements in artificial intelligence and digital technologies. Operating margins for the segment expanded dramatically, rising more than 1,100 basis points (bps) to 25.8%.

This growth is underpinned by a robust pipeline of data center projects, which now make up more than half of Sterling’s e-infrastructure backlog. The company has also expanded into new regions like the Rocky Mountains, broadening its scope for future projects. These strategic moves position Sterling to capitalize on the increasing demand for digital infrastructure, a trend likely to persist over the long term.

The transportation segment contributed 38% of third-quarter revenues, with a 33.8% rise in revenues for the first nine months of 2024 and an improved operating margin of 6.9% (up 40 bps from a year ago). A $1.4 billion backlog in transportation projects highlights the strong demand in this segment. Federal infrastructure programs like the Infrastructure Investment and Jobs Act have provided a strong tailwind, enabling Sterling to secure high-margin, multi-phase highway projects. These projects not only boost short-term revenues but also offer long-term visibility, extending well into 2025 and beyond.

Sterling’s total backlog of $2.37 billion reflects strong demand across its key markets, particularly in transportation and e-infrastructure. This backlog provides the company with multi-year revenue visibility, ensuring sustained growth.

Financially, Sterling is on solid ground. The company generated $322.8 million in operating cash flow during the first nine months of 2024, enabling strategic investments and share buybacks worth $50.6 million year to date. With $648.1 million in cash and $324 million in term loan borrowings, Sterling maintains a conservative leverage profile. Its untapped $75 million revolving credit facility enhances its financial flexibility.

While Sterling doesn’t currently pay a dividend, it prioritizes growth investments, mergers and acquisitions and share repurchases, creating long-term value for shareholders.

High Return on Equity (ROE) for Sterling Stock

STRL’s trailing 12-month ROE of 27.52% significantly outpaces the average earned by companies in a similar industry. This superior ROE underscores Sterling’s efficient management and ability to generate strong returns for shareholders, further reinforcing its investment appeal.

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Analysts See Upside Despite Premium Valuation

Despite its high valuation, Sterling’s upward revisions in earnings per share (EPS) estimates for 2025 highlight analysts’ confidence in the stock. The projected 8.1% year-over-year EPS growth aligns with its premium pricing.

Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Wall Street analysts have set an average price target of $191.50, suggesting a potential upside of 14.6% from the current levels. The stock’s robust performance in 2024 and strategic focus on high-margin opportunities make it a favorable pick in the infrastructure sector.

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Conclusion: Why Sterling Stock Is a Must-Buy

Sterling’s premium valuation is supported by its strong financial performance, strategic focus on high-growth markets and robust backlog. The E-Infrastructure segment, in particular, positions the company as a leader in the growing digital infrastructure space. Additionally, federal infrastructure funding continues to drive growth in the transportation segment, providing a solid foundation for future revenues.

Sterling’s financial strength, evidenced by its strong cash flow and conservative leverage profile, enhances its ability to invest in growth opportunities. Its upward EPS estimate revisions and Zacks Rank #1 (Strong Buy) rating underscore the stock’s potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

For investors seeking exposure to the infrastructure sector, Sterling offers a compelling mix of growth and financial stability. While the stock trades at a premium, its long-term growth prospects justify its higher price tag, making it an attractive buy.