On Wednesday, DA Davidson adjusted its stance on Sterling Construction (NASDAQ:STRL), downgrading the stock from Buy to Neutral, despite increasing the price target to $115 from the previous $86. The firm acknowledged the absence of major fundamental concerns regarding Sterling's business or market outlook. However, the new guidance suggests that earnings per share (EPS) growth will moderate in 2024, with an anticipated increase of 12% compared to 28% in 2023 and between 48%-68% in prior years.
Sterling Construction has been noted for its ability to reallocate resources effectively to capitalize on stronger markets, despite some areas of softness and delays. The company's fourth quarter showed an impressive 17% margin performance in its segment, which if repeated throughout 2024, could be significantly accretive to the firm's EPS projections. Nevertheless, the mix of projects could affect profit margins from quarter to quarter.
The construction company has demonstrated strong cash generation, with free cash flow (FCF) reaching three times the net income in 2023. While this trend could lead to more attractive FCF multiples, DA Davidson remains cautious, suggesting that it may not be practical to model such performance at this stage. Sterling's liquidity and capital for potential acquisitions were highlighted, with the company being recognized as a strategic buyer that could achieve highly accretive deals.
Sterling's shares have seen a substantial increase, rising 177% over the last year, with a 25% uptick year to date and an 18% rise on Tuesday. DA Davidson believes the stock has merited a re-rating for several years, a recognition that seems to have been realized recently. The new price target is based on 12x/11x the firm's 2024/2025 enterprise value/EBITDA estimates and 13x its 2024/2025 FCF per share estimates.
The firm plans to monitor Sterling's M&A activity, potential near-term awards in data center/manufacturing, and homebuilding activity, all of which could influence short to medium-term projections.
InvestingPro Insights
As Sterling Construction (NASDAQ:STRL) navigates a landscape of moderated earnings growth and strategic acquisitions, the latest metrics from InvestingPro offer a nuanced view of the company's financial health and market performance. Sterling's market capitalization stands at a robust $3.28 billion, reflecting its significant presence in the construction sector. Despite the downgrade from DA Davidson, Sterling's P/E ratio indicates a potentially attractive valuation, trading at 20.26 times earnings, which is relatively low compared to its near-term earnings growth. This aligns with one of the InvestingPro Tips, highlighting that the stock is trading at a low P/E ratio relative to near-term earnings growth.
Investors may also take note of Sterling's substantial price performance, with a remarkable one-year total return of 176.18%. This is complemented by a significant return over the last week of 28.1%, reinforcing the company's recent market momentum. Moreover, the stock is trading at a high Price / Book multiple of 5.66, which could suggest that the market is pricing in expectations for future growth or a reflection of the company's assets' perceived quality and potential.
For investors seeking more in-depth analysis, Sterling Construction has 8 additional InvestingPro Tips available, which could offer further insights into the company's performance and outlook. Interested readers can explore these tips by visiting https://www.investing.com/pro/STRL. Additionally, for those considering an InvestingPro subscription, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing access to a wealth of financial data and expert analysis to inform investment decisions.
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