AI Demand Will Drive Expansion Of E-Infrastructure Projects Into 2025

Key Takeaways

• Sterling Infrastructure's focus on large projects in Transportation and E-Infrastructure boosts backlog, revenue visibility, and future growth potential.
  
• E-Infrastructure growth, driven by AI demand, enhances operating margins and sustains high profitability.
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Catalysts

Engages in the provision of e-infrastructure, transportation, and building solutions primarily in the United States.

• Sterling Infrastructure's shift towards larger multiphase projects in the Transportation and E-Infrastructure sectors is leading to a high probability of increased backlog and revenue visibility for 2025 and 2026, positively impacting revenue growth.
  
• The significant growth in the E-Infrastructure segment, driven largely by demand in the data center market for AI and other technologies, is improving operating margins, which expanded over 1,100 basis points, thereby enhancing net margins.
  
• Growing backlog and a strong pipeline in the E-Infrastructure segment suggest that Sterling Infrastructure can sustain and even enhance its high profitability levels into 2025, which would support growth in earnings.
  
• The capacity and infrastructure investment opportunities presented by federal and onshoring initiatives through 2024 and 2025 can drive elevated growth in the Transportation segment, contributing to robust revenue and profitability growth.
  
• Data center demands, onshoring trends, and anticipated rate cuts in residential construction markets support positive forward-looking conditions in Sterling's business segments, thus supporting expectations for revenue, net margins, and earnings improvement into 2025.

Sterling Infrastructure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sterling Infrastructure's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.8% today to 9.6% in 3 years time.
• Analysts expect earnings to reach $251.3 million (and earnings per share of $7.68) by about December 2027, up from $184.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.9x on those 2027 earnings, up from 29.4x today. This future PE is greater than the current PE for the US Construction industry at 29.8x.
• Analysts expect the number of shares outstanding to grow by 2.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.02%, as per the Simply Wall St company report.

Sterling Infrastructure Future Earnings Per Share Growth

Risks

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Valuation

• The analysts have a consensus price target of $191.5 for Sterling Infrastructure based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.6 billion, earnings will come to $251.3 million, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 7.0%.
• Given the current share price of $176.59, the analyst's price target of $191.5 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.