Sterling (STRL)

Civil infrastructure construction company Sterling Infrastructure (NASDAQ:STRL) beat Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 2.1% year on year to $430.9 million. The company’s full-year revenue guidance of $2.1 billion at the midpoint came in 4.1% above analysts’ estimates. Its non-GAAP profit of $1.63 per share was 12.6% 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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Sterling’s sales grew at an impressive 11.9% compounded annual growth rate over the last five years. Its growth surpassed the average industrials company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Sterling’s annualized revenue growth of 8% over the last two years is below its five-year trend, but we still think the results were respectable.

This quarter, Sterling’s revenue fell by 2.1% year on year to $430.9 million but beat Wall Street’s estimates by 5.4%.

Looking ahead, sell-side analysts expect revenue to decline by 3.3% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Sterling has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 16.7% gross margin over the last five years. Said differently, Sterling had to pay a chunky $83.29 to its suppliers for every $100 in revenue.

Sterling’s gross profit margin came in at 22% this quarter, marking a 4.5 percentage point increase from 17.5% in the same quarter last year. Sterling’s full-year margin has also been trending up over the past 12 months, increasing by 3.5 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Sterling has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.8%, higher than the broader industrials sector.

Looking at the trend in its profitability, Sterling’s operating margin rose by 5.8 percentage points over the last five years, as its sales growth gave it immense operating leverage. Its expansion shows it’s one of the better Engineering and Design Services companies as most peers saw their margins plummet.

This quarter, Sterling generated an operating profit margin of 13%, 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.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sterling’s EPS grew at an astounding 46.4% compounded annual growth rate over the last five years, higher than its 11.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Sterling’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Sterling’s operating margin expanded by 5.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses 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 38.4% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.

In Q1, Sterling reported EPS at $1.63, up from $1.00 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 $6.73 to grow 19.1%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 13.9 percentage points during that time. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability.

Sterling’s free cash flow clocked in at $66.96 million in Q1, equivalent to a 15.5% margin. This result was good as its margin was 9.4 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Sterling’s five-year average ROIC was 24.5%, 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.

Companies with more cash than debt have lower bankruptcy risk.

Sterling is a profitable, well-capitalized company with $638.6 million of cash and $358.7 million of debt on its balance sheet. This $280 million net cash position is 5.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Sterling blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also glad it lifted its full-year guidance for each metric, trumping Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 5.3% to $175 immediately after reporting.

Updated: May 21, 2025 at 10:05 PM EDT

When considering an investment in Sterling, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Sterling is one of the best industrials companies out there. First of all, the company’s revenue growth was impressive over the last five years. 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 22.8x. Scanning the industrials landscape today, Sterling’s fundamentals clearly illustrate that it’s an elite business, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $216 on the company (compared to the current share price of $181.98), implying they see 18.7% upside in buying Sterling in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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