Construction And Healthcare Trends Will Unlock Lasting Market Expansion

Key Takeaways

• Diversification through acquisitions and expansion into construction, energy, and healthcare positions Star Equity to benefit from strong sector trends and rising demand.
  
• Operational efficiency and a focus on high-margin, technology-driven services are expected to drive profitability and create new recurring revenue streams.
  
• Dependence on acquisition-led growth, rising costs, and cash flow volatility threaten Star Equity Holdings’ path to profitability and heighten risks around liquidity and long-term stability.

Catalysts

A diversified holding company, engages in the construction business in the United States.

• The record-high backlog in the Building Solutions division, more than doubling year-over-year, indicates strong pent-up demand as delayed construction projects resume post-interest rate hikes—positioning Star Equity for accelerated revenue recognition and cash flow growth over the next several quarters.
  
• Recent acquisitions (Timber Technologies, Alliance Drilling Tools) and the launch of the Energy Services division expand Star Equity’s presence in construction and infrastructure markets, directly benefiting from ongoing infrastructure spending and urbanization, which is expected to drive revenue and improve overall profitability.
  
• Management’s ongoing operational efficiency initiatives (reduction in SG&A as a percentage of revenue, focus on high-margin and low maintenance CapEx businesses) are expected to yield higher net margins and improved earnings as recent acquisitions are integrated and scale is achieved.
  
• The positive secular demographic shift—namely, increased demand for diagnostic imaging and healthcare services due to an aging population—sets up the healthcare segment for stable, long-term revenue growth as deferred projects and spending catch up over the coming years.
  
• The company’s strategy of leveraging digital adoption and investing in higher-margin, technology-driven service offerings positions it to capture new recurring revenue streams and capitalize on long-term trends in both healthcare and construction, supporting sustained top-line and earnings growth.

Star Equity Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Star Equity Holdings's revenue will grow by 25.1% annually over the next 3 years.
• Analysts are not forecasting that Star Equity Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Star Equity Holdings's profit margin will increase from -20.0% to the average US Consumer Durables industry of 7.2% in 3 years.
• If Star Equity Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $8.0 million (and earnings per share of $2.67) by about August 2028, up from $-11.4 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 4.5x on those 2028 earnings, up from -0.6x today. This future PE is lower than the current PE for the US Consumer Durables industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Star Equity Holdings Future Earnings Per Share Growth

Risks

• Star Equity Holdings continues to sustain net losses from continuing operations, with Q1 2025 showing a net loss of $1.2 million and a non-GAAP adjusted net loss of $1.7 million, signaling ongoing challenges to achieving profitability and ultimately impacting earnings and shareholder value.
  
• The company’s increasing SG&A expenses—driven by recent acquisitions and M&A activity—may erode improvements in gross margins, putting pressure on net margins and potentially leading to structurally high operating costs relative to revenue.
  
• Heavy reliance on acquisition-led growth (such as operations at Timber Technologies and Alliance Drilling Tools) exposes Star Equity to integration risks; failure to integrate acquisitions successfully or to realize projected synergies could dilute value and increase the risk of impaired assets, negatively affecting long-term earnings.
  
• The seasonal and project-based nature of the Building Solutions and EdgeBuilder segments, combined with factors like severe weather delays or possible future supply chain disruptions, could result in revenue volatility and unpredictable cash flow, stressing the company’s financial stability.
  
• Usage of revolving credit facilities and upfront cash for acquisitions has led to a notable decline in the company’s unrestricted cash balance (from $4.0 million at year-end 2024 to $1.9 million at the end of Q1 2025); continued high leverage and greater borrowing costs in a rising interest rate environment could further impact liquidity and future profitability.

Valuation

• The analysts have a consensus price target of $8.5 for Star Equity Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $111.9 million, earnings will come to $8.0 million, and it would be trading on a PE ratio of 4.5x, assuming you use a discount rate of 12.3%.
• Given the current share price of $2.01, the analyst price target of $8.5 is 76.4% higher.
• 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.