STRL Stock Study (6-7-23)

I recently did a stock study on Sterling Infrastructure Inc. (STRL) with a closing price of $51.68.

Value Line writes:

     > Sterling Infrastructure, Inc. operates through a variety of
     > subsidiaries, providing design, engineering, and construction
     > services on projects such as highways, bridges, roads, data
     > centers, e-commerce distribution centers, warehousing, energy,
     > and more. The company reports sales in three segments;
     > EInfrastructure Solutions (51% of total revenues in 2022),
     > Transportation Solutions (31%), and Building Solutions (18%).

Over the last decade, this medium-size company has grown sales 14.3% per year. Earnings have increased 32.7% per year since 2018 [previous years excluded due to fractional and/or negative EPS that otherwise artificially inflate growth rate]. Lines are mostly up, straight, and parallel except for a sales dip in ’15. PTPM has trended higher from -12.4% to 7.9% with a last-5-year mean of 4.5%. Peer averages have been roughly on par over the decade while industry averages have been slightly ahead despite themselves trending lower.

Since turning positive in ’17, ROE has mostly led peer and industry averages while also trending higher; the last-5-year mean is 19.3%. Debt-to-Capital has been higher than peer and industry averages—peaking at 67.0% in ’19 and falling to 50.9% in ’22 with a last-5-year mean of 53.5%.

Interest Coverage and Quick Ratio are 7.1 and 1.3, respectively. Value Line gives a B+ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 5.6% YOY and 8.0% per year for ’23 and ’22-’24 (based on 2 analysts).
• YF projects YOY 10.1% and 7.2% for ’23 and ’24, respectively (3 analysts).
• Zacks projects YOY 11.4% and 16.8% for ’23 and ’24, respectively (3).
• Value Line projects 9.2% annualized growth from ’22-’27.
• CFRA projects 10.2% YOY and 8.7% per year for ’23 and ’22-’24, respectively (3).
• M* gives a 2-year ACE of 8.4% per year.

I am forecasting conservatively below the range at 6.0%.

With regard to EPS growth:

• CNN Business projects 11.4% YOY and 14.0% per year for ’23 and ’22-’24, respectively (based on 2 analysts), along with 5-year annualized growth of 18.0%.
• MarketWatch projects 12.1% YOY and 14.4% per year for ’23 and ’22-’24, respectively (2 analysts).
• Nasdaq.com projects 16.8% YOY for ’24 (3).
• Seeking Alpha projects 4-year annualized growth of 18.0%.
• YF projects YOY 1.1% and 16.8% for ’23 and ’24, respectively (3), along with 5-year annualized growth of 11.0%.
• Zacks projects YOY 11.4% and 16.8% for ’23 and ’24, respectively (4), along with 5-year annualized growth of 18.0%.
• Value Line projects 14.4% annualized growth from ’22-’27.
• CFRA projects 11.4% YOY and 14.0% per year for ’23 and ’22-’24, respectively (3).
• M* projects long-term annualized growth of 18.0%.

At worst, data duplication means what I hope to be a diverse set of estimates may actually represent a much smaller sample. In this instance, I find it interesting that five different long-term estimates are either 11.0% or 18.0%. With only 2-4 analysts reported per data source, perhaps more duplication is taking place than I usually see.

To avoid such concerns, I am forecasting at the bottom of the long-term-estimate range at 11.0% (mean of 6: 16.0%).

My Forecast High P/E is 10.5. Since EPS turned positive in 2017, high P/E has fallen from 44.0 to 10.6 with a last-5-year mean of 13.6. The last-5-year-mean average P/E is 10.5. I am using the latter.

My Forecast Low P/E is 6.5. Since EPS turned positive in 2017, low P/E has fallen from 18.0 to 6.5 with a last-5-year mean of 7.3. I am forecasting at the ’22 low P/E (only ’20 is lower at 4.5).

My Low Stock Price Forecast (LSPF) is the default value of $20.30. This is 60.7% less than the previous closing price. That seemed extreme until I realized the 52-week low is only 1.0% greater.

These inputs land STRL in the SELL zone with a U/D ratio of 0.1. Total Annualized Return is 1.4%.

PAR (using Forecast Average—not High—P/E) is -2.8%. Even with a healthy margin of safety (MOS), this stock is far from the BUY zone, which is not a surprise for a stock up ~60% over the past 12 months.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 32 studies over the past 90 days (my study and 11 outliers excluded), averages (lower of mean/median) for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 9.6%, 14.0%, 13.1, and 7.3, respectively. I am lower across the board. Value Line projects an average annual P/E of 12.0, which is higher than MS (10.2) and mine (8.5). MOS seems robust in the current study.

MS high and low EPS are $6.09/share and $2.90/share compared to my $5.27 and $3.13. My high EPS is lower due to a lower EPS growth rate.

MS LSPF of $21.70 is only 6.7% greater than mine. It implies an MS low P/E of 7.5: consistent with the above-stated 7.3. This is relatively good consensus despite a small MS sample size.

PEG ratio is another value check I have recently begun to monitor. With 1.0 – 1.5 generally considered the upper limit, STRL’s PEG is 0.82. Value Line concurs: “The equity currently offers about average capital appreciation potential over the 3- to 5-year investment horizon.”

What doesn’t agree is this study, which pegs the stock as substantially overvalued. I would consider a BUY under $29.