Sterling Construction Is An Attractive Picks-And-Shovels AI Play

Core Investment Theme - The article emphasizes the "picks-and-shovels" investment theme related to AI, focusing on companies that provide essential infrastructure for AI development rather than those directly involved in AI technology [2][3]. Company Spotlight: Sterling Infrastructure, Inc. (STRL) - STRL is highlighted as a strong player in the picks-and-shovels AI theme, particularly in data center construction, which is expected to yield market-beating returns with lower risk compared to high-profile AI stocks like NVIDIA [3][10]. - STRL's business is organized into three segments: E-Infrastructure Solutions, Transportation Solutions, and Building Solutions, with E-Infrastructure being the largest segment [6][7]. Financial Performance - STRL's revenue and operating profit have shown growth, with a notable increase in operating margins across its segments. For instance, the operating margin for E-Infrastructure Solutions improved from 13.42% in 2022 to 18.52% in the first half of 2024 [7][10]. - The company reported a revenue of $2.17 billion for 2024, with projections for continued growth in 2025 [18]. Market Trends and Demand - There is a significant demand for larger data center projects, with STRL's backlog for data centers now accounting for over 40% of its total backlog, indicating strong future growth potential [11][12]. - The company is expanding geographically, having secured large data center projects in the Rocky Mountain region, which diversifies its operational footprint [11][12]. Strategic Focus - STRL is transitioning from low-margin, high-volume work to higher-margin projects, which is expected to enhance profitability. This strategic shift is reflected in its financial metrics, showing above-peer earnings growth despite lower revenue growth [25][26]. - The company has a disciplined approach to capital allocation, focusing on strategic M&A and share repurchase programs to enhance shareholder value [28][29]. Competitive Position - STRL has consistently outperformed its peers in the Construction and Engineering Industry, as well as the SPDR S&P 500 ETF Trust, showcasing its strong market position [23][24]. - The company maintains a solid financial structure, with favorable metrics such as an interest coverage ratio of 8.39 and a debt-to-equity ratio of 56.96%, indicating strong financial health compared to industry medians [27].