Sterling (STRL)

Civil infrastructure construction company Sterling Infrastructure (NASDAQ:STRL) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 16% year on year to $689 million. The company’s full-year revenue guidance of $2.38 billion at the midpoint came in 5.9% above analysts’ estimates. Its non-GAAP profit of $3.48 per share was 22.6% above analysts’ consensus estimates.

Company Overview

Involved in the construction of a major highway, the Grand Parkway in Houston, TX, Sterling Infrastructure (NASDAQ:STRL) provides civil infrastructure construction.

Companies providing engineering and design services boast ever-evolving technical expertise. Compared to their counterparts who manufacture and sell physical products, these companies can also pivot faster to more trending areas due to their smaller physical asset bases. Green energy and water conservation, for example, are current themes driving incremental demand in this space. On the other hand, those providing engineering and design services are at the whim of construction and infrastructure project volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.

Sterling’s competitors in the civil construction and infrastructure sector include Granite Construction (NYSE:GVA), AECOM (NYSE:ACM), and private company Kiewit.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Sterling grew its sales at a solid 9.4% compounded annual growth rate. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Sterling’s recent performance shows its demand has slowed as its annualized revenue growth of 7.4% over the last two years was below its five-year trend.

This quarter, Sterling reported year-on-year revenue growth of 16%, and its $689 million of revenue exceeded Wall Street’s estimates by 11.3%.

Looking ahead, sell-side analysts expect revenue to grow 18.3% over the next 12 months, an improvement versus the last two years. This projection is eye-popping and indicates its newer products and services will fuel better top-line performance.

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

Sterling’s gross margin is slightly below the average industrials company, giving it less room to invest in areas such as research and development. As you can see below, it averaged a 28.8% gross margin over the last five years. Said differently, Sterling had to pay a chunky $71.16 to its suppliers for every $100 in revenue.

In Q3, Sterling produced a 175% gross profit margin, marking a 153.4 percentage point increase from 21.9% in the same quarter last year. Sterling’s full-year margin has also been trending up over the past 12 months, increasing by 50 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Sterling has managed its cost base well over the last five years. It demonstrated solid profitability for an industrials business, producing an average operating margin of 11.1%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Sterling’s operating margin rose by 8.6 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Sterling generated an operating margin profit margin of 18.2%, up 3.4 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sterling’s EPS grew at an astounding 42.6% compounded annual growth rate over the last five years, higher than its 9.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into the nuances of Sterling’s earnings can give us a better understanding of its performance. As we mentioned earlier, Sterling’s operating margin expanded by 8.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Sterling, its two-year annual EPS growth of 46.7% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, Sterling reported adjusted EPS of $3.48, up from $1.98 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Sterling’s full-year EPS of $9.08 to grow 13.6%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Sterling has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 14.3% over the last five years.

Taking a step back, we can see that Sterling’s margin expanded by 8.7 percentage points during that time. This is encouraging because it gives the company more optionality.

Sterling’s free cash flow clocked in at $63.97 million in Q3, equivalent to a 9.3% margin. The company’s cash profitability regressed as it was 14 percentage points lower than in the same quarter last year, but we wouldn’t read too much into it because capital expenditures can be seasonal and companies often stockpile inventory in anticipation of higher demand, causing quarter-to-quarter swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Sterling’s five-year average ROIC was 28%, placing it among the best industrials companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Sterling’s ROIC has increased significantly. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Sterling reported $306.4 million of cash and $359.2 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $438.1 million of EBITDA over the last 12 months, we view Sterling’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $4.00 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Sterling blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Looking ahead, full-year revenue and full-year EPS guidance were both raised. Zooming out, we think this was a very good print with some key areas of upside. The stock traded up 5.2% to $413.50 immediately following the results.

Updated: December 4, 2025 at 9:05 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Sterling.

Sterling is one of the best industrials companies out there. To begin with, its revenue growth was solid over the last five years, and its growth over the next 12 months is expected to accelerate. And while its low gross margins indicate some combination of competitive pressures and high production costs, its rising cash profitability gives it more optionality. On top of that, Sterling’s expanding operating margin shows the business has become more efficient.

Sterling’s P/E ratio based on the next 12 months is 28.3x. Analyzing the industrials landscape today, Sterling’s positive attributes shine bright. We think it’s one of the best businesses in our coverage and like the stock at this price.

Wall Street analysts have a consensus one-year price target of $453.33 on the company (compared to the current share price of $333.06), implying they see 36.1% upside in buying Sterling in the short term.