Traffic Jams Have a Sterling Solution

07/03/2007 12:00 am EST

Focus:

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

Elliot Gue, editor of the Energy Strategist, finds a company that will benefit from increased building of infrastructure to ease highway congestion.

No, it’s not just your imagination: traffic in the US just keeps getting worse, particularly in the nation’s major metropolitan areas.

According to a 2005 study by the Texas Transportation Institute, motorists spend an average of 47 hours per year stuck in traffic. Collectively, that results in 2.3 billion gallons of wasted fuel and 3.7 billion hours in wasted time on the road.

This is a major bottleneck for the economy. Consider that with gasoline at $3.00 per gallon across most of the US, that’s close to $7 billion in money wasted on fuel alone in a single year. And according to the same study, those 3.7 billion hours are worth more than $60 billion annually.

The simple fact is that highway infrastructure just hasn’t been keeping pace with the growth in demand. Consumers are traveling more and more every year, and the population in some of America’s largest urban areas continues to expand and move further into the suburbs. Yet many are still traveling over highways and bridges built 20 or more years ago.

Traffic congestion has become notably worse during the past two decades. In 1982, the average motorist could expect to spend 70% of his commute traveling along uncongested roads. Now, that same motorist can expect traffic-free travel just 33% of the time.

All this adds up to more spending on highways, bridges, and overpasses. That spending has already started—state and local authorities and even the federal government are getting into the act, building out highway infrastructure to meet all this new demand.

This is all great news for Sterling Construction (NASDAQ: STRL). The company focuses on building highways and water infrastructure, primarily in Texas. In recent quarters, however, it’s been Sterling’s construction business that’s been on fire. In the first quarter alone, Sterling was awarded $68 million in new contracts, bringing its backlog to just under $400 million. And since the quarter ended, Sterling has won a handful of new contracts including a near-$40-million deal reconstructing a damaged section of a major interstate highway.

Early in 2007, Sterling was adversely affected by wet weather, which slowed down the pace of project construction and led to higher labor expenses and a decline in profitability. The decline looked worse in comparison to the first quarter of 2006; that period was unseasonably dry, having the opposite positive effect on profits.

But weather is fickle and Sterling managed its expenses well through this period. We don’t see this as a long-term concern. Also interesting is that management opened the door to potential acquisitions both within Texas [and] in neighboring states during its recent earnings conference call. Such an acquisition would be a positive as the South is one of the nation’s fastest-growing regions—that spells plenty of demand for new highway construction. Buy Sterling Construction under 27. (The stock closed Monday just below $21—Editor.)

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