Sterling Infrastructure: Solid Q2 Earnings Back Up My Bullishness

Investment Thesis - Sterling Infrastructure (NASDAQ:STRL) has experienced a 47% stock rally since October 2023, outperforming the broader U.S. market, and maintains a high Seeking Alpha Quant rating [4] - The company is expected to benefit from recent developments and secular trends, with an attractive valuation and significant upside potential, leading to a "Strong Buy" rating [4] Recent Developments - In Q2 2024, Sterling Infrastructure reported an 11.6% year-over-year revenue growth, surpassing consensus estimates, with adjusted EPS increasing from $1.27 to $1.67 [5] - The operating margin improved by 95 basis points year-over-year, indicating strong operating leverage [5] - The company generated $70 million in free cash flow during Q2, enhancing its balance sheet and liquidity, with total cash exceeding total debt [6] Balance Sheet Overview - Total cash stands at $539.99 million, with total debt at $387.90 million, resulting in a net debt of -$152.09 million [7] - The current ratio is 1.24, and the quick ratio is 1.21, indicating solid liquidity [7] - The debt/free cash flow ratio is 3.65, and long-term debt constitutes 31.96% of total capital [7] Guidance and Future Outlook - Management raised guidance for FY 2024 revenue to approximately $2.19 billion, a 12% increase compared to FY 2022 [8] - Expected EBITDA growth from $264 million in 2023 to around $305 million in 2024 [8] Segment Performance - E-Infrastructure Solutions revenue was $241.3 million in Q2 2024, with an operating margin of 21.4% [10] - Transportation Solutions revenue increased to $232.8 million, maintaining an operating margin of 6.6% [10] - Building Solutions revenue was $108.7 million, with an operating margin of 12.7% [10] Market Position and Trends - The backlog in E-Infrastructure is growing, up 7% at the end of Q2 compared to the beginning of the year, indicating strong demand [11] - The company is positioned to benefit from increased data center investments driven by technological advancements and a housing shortage in the Building Solutions segment [12] Valuation Analysis - The stock has outperformed the broader U.S. market with a 35.5% rally since last August, and current multiples suggest undervaluation compared to sector medians [14] - A discounted cash flow (DCF) simulation indicates a fair value above $7 billion, suggesting a 120% upside potential [18] Conservative Scenario - Even under conservative revenue growth and free cash flow margin assumptions, the stock remains approximately 61% undervalued, indicating a significant margin of safety [81]