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.
For a closer look, visit http://www.strlco.com
MissionIR is committed to connecting the investment community with companies that have great potential and a strong dedication to building shareholder value. We know our reputation is based on the integrity of our clients and go to great lengths to ensure the companies represented adhere to sound business practices.
Sign up for “The Mission Report” at www.MissionIR.com
Please see disclaimer on the MissionIR website http://www.missionir.com/disclaimer.html
