Infrastructure construction continues to makes headlines as a way to revive the economy. While the focus seems to be on larger companies with a more national footprint, a small-cap company in Texas continues to prosper as it picks and chooses its way through an array of projects in one of the most infrastructure-thirsty regions in the country.
Sterling Construction (STRL) is a $200 million infrastructure gem that is quietly picking up a lot of business. In the past two months, the company has been awarded or has been the low bidder on more than $200 million worth of infrastructure work. What started out as a company doing business solely in Texas has grown into a business that reaches into Arizona, Utah and Nevada. Since coming out of the recession, Sterling's backlog has increased from about $400 million to more than $700 million today.
Sterling's business benefits enormously from federal transportation bills. But the company's nimble size and market focus gives it an opportunity to grow when other larger players may not. The Texas Department of Transportation is expected to spend $2.6 billion in 2012 and another $2.4 billion in 2013 on highways and related infrastructure. The figure is $750 million in 2012 for Utah and $1.2 billion in Arizona. Whether it's a $15 million restoration project or a $100 million highway construction job, Sterling has the versatility to do either job profitably.
Speaking of profitability, Sterling's management has shown discipline throughout the years. While picking up new projects is important, for Sterling it is more important that they be profitable projects. Sterling has no interesting in fluffing the sales numbers at the expense of the bottom line. The result is a business that has been consistently profitable during this entire economic crisis.
The company's balance sheet is fitting of the name Sterling. As of Sept. 30, 2011, cash and short-term investments totaled $66 million against long-term debt of $8 million. Shares trade for $12, or book value. Strip out the net cash of about $4 a share and the stock trades for about 12x 2011 full-year earnings. This past year, it should be noted, was a very flat year for Sterling and the company expects a strong recovery in 2012. Analysts estimate EPS of $0.84 in 2012, though that could prove conservative if Sterling continues to build up its pipeline as it has been so far in January.
Sterling is a cash-rich, highly-profitable small-cap infrastructure company that is trading at book value and under 10x forward earnings, ex-cash on the balance sheet. Compare that to the larger Granite Construction (GVA), which is valued at $1 billion and 18x forward earnings. If Granite wanted to take its business to the next level, Sterling is the perfect acquisition, although I think a valuation in the neighborhood of $400 million would have to be made.
In fact, it is precisely the value to a private buyer that makes Sterling such a cheap business today. A consistently profitable infrastructure company with a backlog of nearly $700 million and growing, annual sales in excess of $500 million and a long growth curve should not have an enterprise value of $140 million. After a flat 2011, 2012 is likely to be stronger given the level of bid activity coming out of the company. The market will get more color when the company announces full-year results later this month. Regardless of what happens in the short term, Sterling is heading higher in the long run.