2023-12-11 09:48:09 ET
Summary
- Sterling Infrastructure has acquired Professional Plumber Group, which is expected to accelerate its growth by expanding its service offerings and customer base.
- The company reported strong financial results, with revenue and net income increasing significantly.
- Sterling Infrastructure appears optimistic about its future growth and has updated its guidance for FY2023, expecting increased revenue and net income.
- After comparing the forward P/E ratio of 14.28x with the sector median of 14.85x, we can conclude that the company is undervalued.
Investment Thesis
Sterling Infrastructure ( STRL ) is an infrastructure company that engages in E-infrastructure, Transportation, and Building Solutions. The company has recently acquired Professional Plumber Group, which I believe can accelerate its growth by increasing its service offerings and customer base.
About STRL
STRL is a infrastructure company that operates in three segments focusing on E-infrastructure, Transportation, and Building Solutions . It mainly targets the regions in the Southern, Northeastern, Mid-Atlantic U.S., the Rocky Mountain States, and Hawaii. Its E-Infrastructure Solutions segment serves the blue-chip end users in the data center, e-commerce, warehousing, distribution center, energy sectors, and more. This segment contributed approximately 51% to the company’s total annual revenue in 2022. The Transportation Solutions segment consists of heavy highway, aviation and rail, and highly depends on federal and state infrastructure spending. The primary markets of these segments are Colorado, Arizona, Nevada, Texas, Utah, and Hawaii. Its major clients within these main markets are the Departments of Transportation ("DOT(s)") of the different states, as well as regional transit, airport, port, water, and railroad authorities. This segment contributed approximately 31% to the total annual revenues. Its Building Solutions segment is made up of its commercial and residential business. The primary market for its residential business is Texas, specifically Houston and Dallas-Forth Worth. Its commercial business specializes in concrete work for prominent builders and general contractors in commercial markets, including raised slabs, parking structures, and multifamily foundations. This segment contributed approximately 18% to the total revenue in the previous year.
Acquisition of Professional Plumbers
The company has achieved a 41% QoQ revenue upside in its Building Solutions segment, out of which 29% growth was organic. This reflects that the demand has been highly boosted in this segment. The residential and commercial construction sectors saw a significant downturn after the Fed interest rate hikes. However, the market has considerably rebounded and led to an increased demand in the industry. The single-family homebuilding surged in September and experienced a 3.2% rise . I believe this improvement indicates a relatively stabilized market and presents a good opportunity for the company. Identifying these scenarios, the firm has recently announced the acquisition of Texas-based Professional Plumbers Group, which has annual revenues in the range of $50 to $55 million. PPG mainly provides its services to residential home builders in greater Dallas. This transaction was executed at a purchase price of $50 million. I believe this acquisition can act as a catalyst to boost the company's growth as it will expand the company’s service offerings in the top markets, which can help it significantly increase its customer base by making it strongly positioned to capture the growing demand and further increase its profitability. I think as the company broadens its suite of residential services and customer base, it can also help it to create a strong presence in the competitive market because it can facilitate the company with excellent cross-selling opportunities which can add to its revenues and expand its profit margins.
Financials
The company has reported its quarterly results. It reported a revenue of $560.34 million, up 13.65% compared to $493.04 million in Q322. This growth was mainly fueled by healthy demand dynamics in all three segments. Net income surged by 33.29% YoY from $29.52 million to $39.35 million. It reported a diluted EPS of $1.26. The E-Infrastructure, Transportation, and Buildings segment revenues were $255.53 million, $192.99 million, and $113.40 million respectively. STRL reported $409.39 million in liquidity and adjusted EBITDA stood at $71.31 million.
The company has reported a strong quarter due to favorable demand dynamics in all of its segments. The manufacturing and data center markets are experiencing robust demand as technological transformation is becoming essential in all industries. The company has ongoing large projects in the Southeast that can help it cater to the growing demand in this sector and increase its profitability. It is also anticipating a broad-base demand for its transportation solutions in the end market as state and local funding has increased significantly, which might help the company to maintain its growth trajectory. In addition, the company is also strongly positioned to capitalize on opportunities in the residential market, as it has recently acquired Professional Plumbers Group, which can help it to broaden its customer base and service portfolio by capturing additional market share and expanding its profit margins.
The company is also highly optimistic about its growth as it has updated its guidance for FY2023. It expects revenue between $1.99 billion to $2.05 billion. This upside can be achieved through organic growth as well as acquisitions. The firm estimates the net income in the range of $128 million to $132 million. The diluted EPS can reach $4.10 to $4.23. It also anticipates an EBITDA of $252 million-$260 million. Observing the active demand momentum in the industry and its recent acquisition to broaden its customer base, I believe the company’s estimates are correct.
What is the Main Risk Faced by STRL?
The company highly depends on third-party suppliers to obtain all of the materials such as aggregates, asphalt, cement, steel, concrete, oil, and fuel. If the supply of these components gets disrupted due to supply chain issues, rising inflation, wage pressures, labor shortages, and potential economic slowdown, it can impact the company’s operations negatively and can further contract its profit margins. In addition, geopolitical conflicts might also result in increased prices of these materials, which can further increase the company’s costs and lead to reduced profitability.
Valuation
Recently, the company has achieved strong growth in all of its operating segments. I think it can sustain this upside in the future as the demand dynamics are highly positive, and it can potentially increase its customer base because it has recently acquired Professional Plumbers Group, which can increase its profitability by helping it capture the additional market share. After considering all these factors, I am estimating an EPS of $4.81 for FY2024, which gives the forward P/E ratio of 14.28x. After comparing the forward P/E ratio of 14.28x with the sector median of 14.85x, we can conclude that the company is undervalued. I think the firm can potentially grow in the coming quarters as a result of positive demand in the industry and its expansion activities, which can help it to trade above its current P/E ratio. I estimate that the company might trade at a P/E ratio of 18.90x in 2023, giving the target price of $90.90, which is a 32.32% upside compared to the current share price of $68.70. Supply disruptions can affect the financial performance of the company during adverse economic conditions. I think in that case, it can contract the profit margins and EPS of the company.
Scenario | EPS Estimates | P/E Ratio Estimates | Target Price |
Best case | $4.81 | 18.90x | $90.90 |
Bear case | $4.70 | 18.84x | $88.54 |
I believe in the bear case scenario of reduced sales due to supply disruptions, the EPS of FY2024 might be $4.70, and estimate that the company might trade at a P/E ratio of 18.84x, which gives a target price of $88.54, representing an upside of 28.89%.
Conclusion
The company’s strong results reflect the significant industrial tailwinds and its well-positioning. I believe the company can grow further in the coming quarters as it has recently acquired Professional Plumbers Group, which can boost its profitability by expanding its service offerings and customer base. However, unavailability or high prices of raw materials can hinder its growth. The stock is currently undervalued, and we can expect a healthy 29%-32% growth from the current price levels as a result of its recent expansion activities. After considering all the above factors, I assign a buy rating to STRL.
For further details see:
Sterling Infrastructure: Professional Plumbers Acquisition Can Accelerate The Growth