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Sterling Construction Company, Inc. (STRL) In-House Sourcing, Solid Margins, Growing Backlog, and an Established Presence in Key Markets

Analysis of the overall construction market by Washington, D.C.-based transportation infrastructure investment concern, the American Road and Transportation Builders Association (ARTBA), shows a solid rebound in previously declining public construction expenditure starting sometime back in 2013. This looks like a lagging, but mirrored expression of the now sustained 48 percent or greater rebound in the $700 billion private construction market that began back in 2011, with public construction expenditures up over 6.5 percent during 2014 to around $277 billion. The transportation segment was the biggest winner for public construction expenditures at around eight percent growth and ARTBA’s industry forecast for 2015 sees rail as the clear winner moving forward with over 14 percent projected growth, even though it represents only around a third of pavement expenditures (slated to grow 2.2 percent), or two thirds of what is spent on bridges and tunnels (forecast to grow 1.6 percent).

The heavy-civil construction market is particularly interesting here for investors, with substantial ongoing lift and earthmover heavy equipment costs, as well as a difficult-to-navigate world of contract acquisition, creating significant constraints for the big boys, and the smaller, less adroit companies as well. BLS Producer Price Index data analyzed by ARTBA further indicates that concrete and asphalt prices are set to steadily rise moving forward, meaning that maximum profitability will fall to those within the sector who are capable of exploiting connections or in-house sourcing in order to keep margins tight. In such an environment, big name heavy-civil construction operators like California-based Tutor Perini (NYSE: TPC) may increasingly find themselves on a difficult footing when going up against competitors like storied industry giant, Granite Construction (NYSE: GVA), which has at its disposal a sizeable construction materials production segment, in addition to its heavy-civil and other infrastructure operations.

These underlying sector dynamics really throw a bright spotlight on a considerably more share price-accessible company like Sterling Construction Company (NASDAQ: STRL), which has an impressive six decades plus track record of successes executing a wide variety of complex municipal, structural, transportation, water and specialty infrastructure projects via its family of companies. In addition, STRL produces asphalt, as well as aggregates from a quarry the company leases. A solid operational history over so many years in key markets across the U.S. that are noteworthy for their strong infrastructure spending, as well as a superb fleet of modern construction equipment, have helped STRL layer up a consistently expanding project backlog, securing choice contracts ahead of even the company’s larger competitors.

The latest such example was the $14 million award of a project last month by the Hawaii Department of Transportation, following up on a streak of successful smaller safety improvements the company did for HDOT on the King Kamanhameha Highway. This time around, STRL’s Road and Highway Builders subsidiary will be cold milling and paving a ten mile stretch of the highway, in addition to handling the reconstruction of four bridges, and the company expects to kick off the project as early as next quarter. The Kamanhameha contract is just the latest in a nice string of projects the company has landed this year, including the $26.3 million project award in late July from the Harris County Toll Road Authority in Houston, Texas – one of the company’s bedrock states.

There was also the giant $58.8 million Texas Department of Transportation contract from early in July, covering a six lane expansion on over eight miles of Interstate 45, as well as widening of seven existing bridges. Or, the $21.3 million Bailey Road widening project for the Houston suburb of Pearland announced earlier in that same month, secured via the company’s ability to underbid everyone else at the table. For STRL, this is about more than just securing prime contracts in what is a company stronghold, it’s about leveraging the company’s own logistical capacity to create value for its shareholders, laying hands on work that will produce good margins, and whose successful completion will help keep Sterling in the good graces of state and local administrators.

There was little surprise among clued-in analysts when the company beat Q3 estimates handily, delivering a robust set of financials in early November, which showed an adjusted $0.09 earnings per share on the strength of a 10.7 percent year-over-year reduction in the cost of sales. Gross profits were also up markedly for the quarter, showing a 72.6 percent gain to $14.5 million when compared with Q3 FY14’s figures, as well as a 3.8 percent rise in gross margins over the same interval.

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