Monday, April 6, 2009

Marcial: Sterling Construction, a Shiny Stimulus Play

Marcial: Sterling Construction, a Shiny Stimulus Play


Some savvy investors have been scouting for infrastructure pure plays, mainly those operating in states where the Obama Administration's American Recovery and Reinvestment Act of 2009—known the world over as the U.S. stimulus package—will have greater impact. One name that has caught attention as a potential significant beneficiary of such spending is Sterling Construction (STRL), a relatively obscure contractor focused on road, rail, bridge, and water infrastructure projects in Texas and Nevada.

"Our research indicates that 86% of the projects that will be funded with stimulus dollars are construction projects, such as new lanes, new roads, and new bridges," says John Kasprzak Jr., an analyst at BB&T Capital Markets (BBT) (it has done business with Sterling), who rates the stock a buy. These are just the kinds of projects most suited to Sterling, he says.

The Texas Transportation Dept., he notes, has a list of 309 projects that will be funded primarily by the stimulus funds—roughly $2.8 billion worth. Five of the largest construction companies in Texas, including Sterling, will be seeking a share of the projects, scheduled for competitive bidding this summer.

flying high since the election

Kasprzak says that because of his confidence in the company's ability to benefit from the stimulus package he has raised his stock price target for Sterling to 22 from 20 a share. The stock has been flying high since November's Presidential election, most probably because of President Barack Obama's promise to create 3.5 million jobs through an infrastructure construction program.

From a low of 9.40 a share last Nov, 21, the stock zoomed to nearly 20 on Jan. 28, 2009. Profit-taking has since pushed the stock down, to 18.64 by Apr. 3. Kasprzak figures the stimulus dollars will help Sterling earn $1.45 a share in 2009 and $1.75 in 2010, up from 2008's $1.32.

"Sterling should benefit from the stimulus package in the coming months as money begins flowing into these projects," says analyst Craig Bell of SMH Capital, who rates the stock a buy. The state transportation budgets in Texas and Nevada, when combined with the stimulus funding, will provide a solid environment for Sterling to win projects and execute successfully over the next several years, he adds.

"Through a combination of growth in state funding and economic stimulus programs, Sterling's heavy construction projects are expected to jump by more than 50% in 2009 and 2010," says John B. Rogers, an analyst at investment firm D.A. Davidson, which would provide substantial opportunities for increased bookings or projects and earnings growth over the coming years. He rates Sterling a buy, with a higher price target of 23 a share. (Davidson expects to do business with Sterling.)

a long-term bet, too

Sterling isn't just a short-term play, however, that depends only on the stimulus package. Based on the prospect of increased economic activity, which should add to its work backlog over the near term and support growth for the long term, "we expect Sterling to realize solid, long-term earnings growth of about 11% over the next five years," says Rogers.

Some of the country's largest institutional investors have discovered and invested in Sterling, whose market capitalization of $233 million is tiny compared to the much larger big-cap stocks in their portfolios. Among them are Wellington Management, its largest shareholder, which owns a stake of 12.5%, or 8.3 million shares, and T. Rowe Price (TROW), with 8.2%, or 1.6 million shares.

Since the push began to bolster the economy through big-ticket infrastructure projects, Sterling's stock has produced nifty returns. And the stimulus spending hasn't even begun.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.



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