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Sterling Stock Surges 50% in 6 Months: Should You Invest Now?
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Sterling Infrastructure, Inc. (STRL - Free Report) has been on an impressive run, surging 49.8% in the past six months and outperforming both the Zacks Engineering - R and D Services industry and the broader Zacks Construction sector, as shown below. Currently trading about 10.3% below its 52-week high of $203.49, reached on Nov. 26, 2024, the stock continues to attract attention. The STRL stock has also outperformed its peer group company, Dycom Industries, Inc. (DY - Free Report) . Dycom shares have surged 5.3% over the same time frame.
However, with a higher valuation and some underlying challenges, is STRL still a compelling buy for investors?
Sterling Stock 6-Month Share Performance
Image Source: Zacks Investment Research
Technical Indicators: Bullish Signals
Sterling’s rally is backed by solid fundamentals. The stock is trading above both its 50-day and 200-day simple moving averages (SMA), as shown below, indicating continued bullish momentum.
Image Source: Zacks Investment Research
At a time when investors are assessing whether the rally is sustainable, Sterling's robust financials, strong cash flow, and growth opportunities in e-infrastructure and transportation infrastructure continue to drive optimism. However, challenges like residential market softness and higher valuations pose important questions for potential investors.
Decoding Sterling’s Tailwinds
E-Infrastructure: A Pillar of Growth for Sterling: The primary driver behind its growth is the E-Infrastructure segment, which accounted for 45% of total third-quarter 2024 revenues. This segment saw a massive 90% year-over-year increase, fueled by surging demand for data centers, AI, and other technology-driven projects.
The segment’s operating margin expanded more than 1,100 basis points to 25.8%, thanks to large, mission-critical projects. With more than 50% of its E-Infrastructure backlog consisting of data center projects, Sterling is well-positioned to capitalize on the rising need for digital infrastructure. Expansion into new regions, like the Rocky Mountains, further strengthens its growth prospects.
Backlog and Transportation Strength: Sterling ended third-quarter 2024 with a record backlog of $2.37 billion, largely due to a shift toward multi-phase projects in transportation and E-Infrastructure. The transportation solutions segment, which contributed 38% of third-quarter 2024 revenues, has also performed well. Revenues in this segment grew 33.8% in the first nine months of 2024, with an improved operating margin of 6.9%.
Federal infrastructure funding, particularly through the Infrastructure Investment and Jobs Act, has been a major tailwind. Sterling has secured multi-phase, design-build highway projects that provide strong revenue visibility into 2025 and beyond. With a solid backlog of $1.4 billion in this segment, Sterling remains well-positioned to benefit from sustained government support.
Strong Cash Flow and Financial Flexibility: Sterling’s financial strength is another key factor in its success. Operating cash flow for the first nine months of 2024 stood at $322.8 million, enabling the company to pursue strategic acquisitions and share buybacks. Year to date, Sterling has repurchased $50.6 million worth of shares.
Despite carrying $324 million in term loan borrowings, the company’s cash balance of $648.1 million surpasses its total debt, reflecting a strong financial position. Scheduled loan repayments are manageable, and with a Debt/EBITDA ratio of 1x, Sterling maintains a conservative leverage profile.
What Can Impact STRL Stock’s Performance?
While Sterling’s growth story is impressive, challenges persist. Revenue volatility, an over-reliance on data center projects, and execution risks in large projects pose potential headwinds.
Additionally, the Building Solutions segment has faced softness, with third-quarter revenues down 10% and operating income declining 12% due to sluggish demand in the Dallas residential market. Rising mortgage rates have delayed construction projects, creating uncertainty in this segment.
STRL Stock Valuation: A Premium Worth Paying?
Valuation is another concern. Sterling trades at a forward price-to-earnings (P/E) ratio of 28.17, a premium to its industry’s 21.95 but lower than peers like Construction Partners, Inc. (ROAD - Free Report) and Comfort Systems USA, Inc. (FIX - Free Report) . Investors must weigh whether this higher valuation is justified by its growth prospects. ROAD and FIX are trading with forward 12-month P/E multiples of 43.5 and 29.78, respectively.
Sterling’s P/E Ratio (Forward 12-Month) vs. Industry
Image Source: Zacks Investment Research
Estimate Revision Trend for STRL Stock: A Key Consideration
While Sterling’s stock has seen a significant rally, its earnings estimate revision trend has been relatively muted. Over the past 60 days, analysts have maintained their earnings per share (EPS) projections rather than increasing them, suggesting that expectations for earnings growth may already be baked into the current valuation. For 2025, Sterling's EPS is projected to grow 8.1% year over year, but the lack of upward revisions raises concerns about whether its momentum can sustain itself.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
How to Play STRL Stock Now?
Analysts remain optimistic about Sterling’s near-term potential. Wall Street’s average price target of $191.50 suggests a 7.3% upside from current levels. Moreover, STRL’s trailing 12-month return on equity of 27.52% outpaces the industry average, reinforcing its strong financial performance.
However, with a lack of earnings estimate revisions and a relatively high valuation, STRL’s stock may already reflect much of its expected growth. With a Zacks Rank #3 (Hold), investors may consider holding onto the stock rather than aggressively buying at current levels. While the company’s fundamentals remain strong, waiting for a better entry point or a positive shift in earnings estimates could be the more prudent approach. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Sterling Stock Surges 50% in 6 Months: Should You Invest Now?
Sterling Infrastructure, Inc. (STRL - Free Report) has been on an impressive run, surging 49.8% in the past six months and outperforming both the Zacks Engineering - R and D Services industry and the broader Zacks Construction sector, as shown below. Currently trading about 10.3% below its 52-week high of $203.49, reached on Nov. 26, 2024, the stock continues to attract attention. The STRL stock has also outperformed its peer group company, Dycom Industries, Inc. (DY - Free Report) . Dycom shares have surged 5.3% over the same time frame.
However, with a higher valuation and some underlying challenges, is STRL still a compelling buy for investors?
Sterling Stock 6-Month Share Performance
Image Source: Zacks Investment Research
Technical Indicators: Bullish Signals
Sterling’s rally is backed by solid fundamentals. The stock is trading above both its 50-day and 200-day simple moving averages (SMA), as shown below, indicating continued bullish momentum.
Image Source: Zacks Investment Research
At a time when investors are assessing whether the rally is sustainable, Sterling's robust financials, strong cash flow, and growth opportunities in e-infrastructure and transportation infrastructure continue to drive optimism. However, challenges like residential market softness and higher valuations pose important questions for potential investors.
Decoding Sterling’s Tailwinds
E-Infrastructure: A Pillar of Growth for Sterling: The primary driver behind its growth is the E-Infrastructure segment, which accounted for 45% of total third-quarter 2024 revenues. This segment saw a massive 90% year-over-year increase, fueled by surging demand for data centers, AI, and other technology-driven projects.
The segment’s operating margin expanded more than 1,100 basis points to 25.8%, thanks to large, mission-critical projects. With more than 50% of its E-Infrastructure backlog consisting of data center projects, Sterling is well-positioned to capitalize on the rising need for digital infrastructure. Expansion into new regions, like the Rocky Mountains, further strengthens its growth prospects.
Backlog and Transportation Strength: Sterling ended third-quarter 2024 with a record backlog of $2.37 billion, largely due to a shift toward multi-phase projects in transportation and E-Infrastructure. The transportation solutions segment, which contributed 38% of third-quarter 2024 revenues, has also performed well. Revenues in this segment grew 33.8% in the first nine months of 2024, with an improved operating margin of 6.9%.
Federal infrastructure funding, particularly through the Infrastructure Investment and Jobs Act, has been a major tailwind. Sterling has secured multi-phase, design-build highway projects that provide strong revenue visibility into 2025 and beyond. With a solid backlog of $1.4 billion in this segment, Sterling remains well-positioned to benefit from sustained government support.
Strong Cash Flow and Financial Flexibility: Sterling’s financial strength is another key factor in its success. Operating cash flow for the first nine months of 2024 stood at $322.8 million, enabling the company to pursue strategic acquisitions and share buybacks. Year to date, Sterling has repurchased $50.6 million worth of shares.
Despite carrying $324 million in term loan borrowings, the company’s cash balance of $648.1 million surpasses its total debt, reflecting a strong financial position. Scheduled loan repayments are manageable, and with a Debt/EBITDA ratio of 1x, Sterling maintains a conservative leverage profile.
What Can Impact STRL Stock’s Performance?
While Sterling’s growth story is impressive, challenges persist. Revenue volatility, an over-reliance on data center projects, and execution risks in large projects pose potential headwinds.
Additionally, the Building Solutions segment has faced softness, with third-quarter revenues down 10% and operating income declining 12% due to sluggish demand in the Dallas residential market. Rising mortgage rates have delayed construction projects, creating uncertainty in this segment.
STRL Stock Valuation: A Premium Worth Paying?
Valuation is another concern. Sterling trades at a forward price-to-earnings (P/E) ratio of 28.17, a premium to its industry’s 21.95 but lower than peers like Construction Partners, Inc. (ROAD - Free Report) and Comfort Systems USA, Inc. (FIX - Free Report) . Investors must weigh whether this higher valuation is justified by its growth prospects. ROAD and FIX are trading with forward 12-month P/E multiples of 43.5 and 29.78, respectively.
Sterling’s P/E Ratio (Forward 12-Month) vs. Industry
Image Source: Zacks Investment Research
Estimate Revision Trend for STRL Stock: A Key Consideration
While Sterling’s stock has seen a significant rally, its earnings estimate revision trend has been relatively muted. Over the past 60 days, analysts have maintained their earnings per share (EPS) projections rather than increasing them, suggesting that expectations for earnings growth may already be baked into the current valuation. For 2025, Sterling's EPS is projected to grow 8.1% year over year, but the lack of upward revisions raises concerns about whether its momentum can sustain itself.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
How to Play STRL Stock Now?
Analysts remain optimistic about Sterling’s near-term potential. Wall Street’s average price target of $191.50 suggests a 7.3% upside from current levels. Moreover, STRL’s trailing 12-month return on equity of 27.52% outpaces the industry average, reinforcing its strong financial performance.
However, with a lack of earnings estimate revisions and a relatively high valuation, STRL’s stock may already reflect much of its expected growth. With a Zacks Rank #3 (Hold), investors may consider holding onto the stock rather than aggressively buying at current levels. While the company’s fundamentals remain strong, waiting for a better entry point or a positive shift in earnings estimates could be the more prudent approach. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.