Cash Reserves May Enable E-Infrastructure Acquisitions, But Revenue Challenges Could Impact Future Performance

Key Takeaways

• Strategic focus on higher-margin services and E-Infrastructure expansion could drive substantial revenue and earnings growth.
  
• Strong liquidity and potential M&A activities support EPS growth and enhanced service offerings.
  
• Geographic expansion challenges and revenue impacts from deconsolidation, competitive bidding, and housing market issues could limit Sterling Infrastructure's growth and future earnings.

Catalysts

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

• The E-Infrastructure backlog reached over $1 billion for the first time, with ongoing unprecedented opportunities and increasing project sizes, signaling strong future revenue growth potential.
  
• The company is focused on shifting its mix toward higher-margin services, which resulted in a gross profit margin of 21% in the fourth quarter, suggesting potential for increased net margins.
  
• Sterling is strategically increasing its footprint in the E-Infrastructure market, with expected revenue growth over 10% and operating profit growth over 25% in 2025, which could drive substantial revenue and earnings growth.
  
• The company's strong liquidity position and cash reserves create opportunities for accretive acquisitions, enhancing service offerings and supporting potential EPS growth through strategic M&A.
  
• Sterling's ongoing share repurchase program and potential for continued buybacks provide a pathway to EPS growth by reducing share count.

Sterling Infrastructure Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sterling Infrastructure's revenue will grow by 1.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 11.6% in 3 years time.
• Analysts expect earnings to reach $255.2 million (and earnings per share of $7.8) by about March 2028, down from $257.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2028 earnings, up from 13.2x today. This future PE is greater than the current PE for the US Construction industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 0.84% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.43%, as per the Simply Wall St company report.

Sterling Infrastructure Future Earnings Per Share Growth

Risks

• The shift away from low-bid work in Texas is expected to result in a moderation of Transportation Solutions' top line growth, impacting overall revenue in that segment.
  
• The deconsolidation of RHB's operating income means that RHB's $236 million revenue will no longer be included in Sterling's consolidated revenue, which may affect total revenue figures.
  
• Residential slab business revenue declined 14% due to affordability challenges in the DFW market, indicating potential risks to revenue if housing market conditions do not improve.
  
• Challenges in expanding geographic reach for data center projects exist due to the cost and logistical issues of deploying crews far from their base. This may impact the ability to capitalize on new opportunities, potentially affecting future revenue.
  
• The competitive bidding environment and the inability to find suitable acquisition targets for expansion could limit growth and, consequently, impact future earnings and margins.

Valuation

• The analysts have a consensus price target of $198.333 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 2028, revenues will be $2.2 billion, earnings will come to $255.2 million, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $111.08, the analyst price target of $198.33 is 44.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.