Sterling Play in Construction

05/30/2016 8:00 am EST

Focus: STOCKS

Bret Jensen

Editor, Biotech Gems

Our newest addition to the portfolio —a civil construction company — is a its turnaround story is in the early innings, suggests Bret Jensen, editor of Small Cap Gems.

Sterling Construction Company (STRL) operates in the southwestern and western states; its builds, repairs, and reconstructs transportation infrastructure projects, including highways, roads, bridges, ports, and water infrastructure projects.

In previous years, Sterling had been operated largely in a “Mom & Pop” manner; mistakes were made and low bids on several large projects had depressed earnings.

However, in 2015, the firm replaced most of the management team that was responsible for these troubles.

This new management team consists of the CEO who came from the heavy infrastructure and construction giant Flour (FLR) as well as its CFO who came from much bigger Chicago Bridge & Iron (CBI).

New management has instilled pricing discipline and operational processes they learned at these giants.

The result of these changes has been impressive margin growth on new business.

Increases in state highway and infrastructure budgets especially in Texas, Utah, and California are providing a nice tailwind for new business.

During the last two quarters, the company won $390 million worth of new projects at an average margin of more than 8.5%.

On its last conference call, management maintained guidance projections of $5 million to $8 million in profits for fiscal year 2016. This would be the company’s first full-year profit since fiscal year 2012.

The current consensus has Sterling making between 50 to 65 cents a share in earnings for fiscal year 2017.

More importantly, management is putting their money where their mouth is. In early May, the CEO bought over $550,000 worth of new stock in Sterling, which is a major vote of confidence in my book.

For a stock trading at just $4.50 a share, that growth is being valued cheaply at the moment. I like the risk/reward profile on this improving turnaround story.

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