Intrinsic value of Sterling Construction - STRL

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$11.00

  Intrinsic Value

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  Value-price divergence*

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of STRL stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.3

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  10.58
  17.00
  15.80
  14.72
  13.75
  12.87
  12.09
  11.38
  10.74
  10.17
  9.65
  9.18
  8.77
  8.39
  8.05
  7.75
  7.47
  7.22
  7.00
  6.80
  6.62
  6.46
  6.31
  6.18
  6.06
  5.96
  5.86
  5.78
  5.70
  5.63
  5.57
Revenue, $m
  690
  730
  845
  970
  1,103
  1,245
  1,396
  1,555
  1,721
  1,896
  2,079
  2,270
  2,469
  2,677
  2,892
  3,116
  3,349
  3,591
  3,842
  4,104
  4,375
  4,658
  4,952
  5,258
  5,577
  5,909
  6,255
  6,617
  6,994
  7,387
  7,798
Variable operating expenses, $m
 
  577
  668
  765
  870
  981
  1,099
  1,223
  1,354
  1,491
  1,634
  1,778
  1,934
  2,096
  2,265
  2,441
  2,623
  2,812
  3,009
  3,214
  3,427
  3,648
  3,878
  4,118
  4,368
  4,628
  4,899
  5,182
  5,477
  5,786
  6,108
Fixed operating expenses, $m
 
  152
  155
  159
  163
  167
  172
  176
  180
  185
  189
  194
  199
  204
  209
  214
  220
  225
  231
  237
  243
  249
  255
  261
  268
  274
  281
  288
  295
  303
  310
Total operating expenses, $m
  695
  729
  823
  924
  1,033
  1,148
  1,271
  1,399
  1,534
  1,676
  1,823
  1,972
  2,133
  2,300
  2,474
  2,655
  2,843
  3,037
  3,240
  3,451
  3,670
  3,897
  4,133
  4,379
  4,636
  4,902
  5,180
  5,470
  5,772
  6,089
  6,418
Operating income, $m
  -5
  1
  22
  45
  70
  97
  125
  156
  187
  221
  256
  298
  336
  376
  418
  461
  506
  553
  602
  653
  706
  761
  819
  879
  941
  1,007
  1,075
  1,146
  1,221
  1,299
  1,380
EBITDA, $m
  11
  18
  41
  67
  94
  123
  153
  186
  221
  257
  295
  335
  376
  419
  465
  512
  560
  611
  664
  719
  777
  836
  899
  964
  1,031
  1,102
  1,176
  1,253
  1,334
  1,418
  1,506
Interest expense (income), $m
  3
  2
  5
  8
  11
  15
  19
  23
  27
  32
  37
  42
  47
  52
  58
  64
  70
  76
  83
  90
  97
  104
  112
  120
  129
  137
  147
  156
  166
  176
  187
Earnings before tax, $m
  -7
  -1
  18
  38
  59
  82
  107
  133
  160
  189
  219
  257
  290
  324
  360
  397
  436
  477
  519
  563
  609
  657
  707
  759
  813
  869
  928
  990
  1,055
  1,123
  1,193
Tax expense, $m
  0
  0
  5
  10
  16
  22
  29
  36
  43
  51
  59
  69
  78
  87
  97
  107
  118
  129
  140
  152
  164
  177
  191
  205
  219
  235
  251
  267
  285
  303
  322
Net income, $m
  -9
  -1
  13
  28
  43
  60
  78
  97
  117
  138
  160
  187
  211
  237
  263
  290
  319
  348
  379
  411
  445
  479
  516
  554
  593
  635
  678
  723
  770
  819
  871

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  43
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  302
  306
  355
  407
  463
  523
  586
  653
  723
  796
  873
  953
  1,037
  1,124
  1,214
  1,308
  1,406
  1,507
  1,613
  1,723
  1,837
  1,955
  2,079
  2,207
  2,341
  2,481
  2,626
  2,778
  2,936
  3,101
  3,274
Adjusted assets (=assets-cash), $m
  259
  306
  355
  407
  463
  523
  586
  653
  723
  796
  873
  953
  1,037
  1,124
  1,214
  1,308
  1,406
  1,507
  1,613
  1,723
  1,837
  1,955
  2,079
  2,207
  2,341
  2,481
  2,626
  2,778
  2,936
  3,101
  3,274
Revenue / Adjusted assets
  2.664
  2.386
  2.380
  2.383
  2.382
  2.380
  2.382
  2.381
  2.380
  2.382
  2.381
  2.382
  2.381
  2.382
  2.382
  2.382
  2.382
  2.383
  2.382
  2.382
  2.382
  2.383
  2.382
  2.382
  2.382
  2.382
  2.382
  2.382
  2.382
  2.382
  2.382
Average production assets, $m
  71
  94
  109
  125
  142
  161
  180
  201
  222
  245
  268
  293
  319
  345
  373
  402
  432
  463
  496
  529
  564
  601
  639
  678
  719
  762
  807
  854
  902
  953
  1,006
Working capital, $m
  29
  37
  43
  49
  56
  64
  71
  79
  88
  97
  106
  116
  126
  137
  147
  159
  171
  183
  196
  209
  223
  238
  253
  268
  284
  301
  319
  337
  357
  377
  398
Total debt, $m
  5
  44
  75
  108
  144
  181
  221
  264
  308
  355
  403
  454
  507
  562
  620
  679
  741
  806
  873
  942
  1,015
  1,090
  1,168
  1,249
  1,334
  1,423
  1,515
  1,611
  1,711
  1,816
  1,926
Total liabilities, $m
  194
  194
  225
  258
  294
  331
  371
  414
  458
  505
  553
  604
  657
  712
  770
  829
  891
  956
  1,023
  1,092
  1,165
  1,240
  1,318
  1,399
  1,484
  1,573
  1,665
  1,761
  1,861
  1,966
  2,076
Total equity, $m
  107
  112
  130
  149
  170
  191
  214
  239
  265
  291
  320
  349
  379
  411
  444
  479
  515
  552
  590
  631
  672
  716
  761
  808
  857
  908
  961
  1,017
  1,075
  1,135
  1,198
Total liabilities and equity, $m
  301
  306
  355
  407
  464
  522
  585
  653
  723
  796
  873
  953
  1,036
  1,123
  1,214
  1,308
  1,406
  1,508
  1,613
  1,723
  1,837
  1,956
  2,079
  2,207
  2,341
  2,481
  2,626
  2,778
  2,936
  3,101
  3,274
Debt-to-equity ratio
  0.047
  0.400
  0.580
  0.730
  0.850
  0.950
  1.030
  1.100
  1.170
  1.220
  1.260
  1.300
  1.340
  1.370
  1.390
  1.420
  1.440
  1.460
  1.480
  1.490
  1.510
  1.520
  1.540
  1.550
  1.560
  1.570
  1.580
  1.580
  1.590
  1.600
  1.610
Adjusted equity ratio
  0.247
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366
  0.366

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -9
  -1
  13
  28
  43
  60
  78
  97
  117
  138
  160
  187
  211
  237
  263
  290
  319
  348
  379
  411
  445
  479
  516
  554
  593
  635
  678
  723
  770
  819
  871
Depreciation, amort., depletion, $m
  16
  17
  19
  21
  23
  26
  28
  31
  33
  36
  39
  37
  40
  43
  47
  50
  54
  58
  62
  66
  71
  75
  80
  85
  90
  95
  101
  107
  113
  119
  126
Funds from operations, $m
  79
  17
  32
  49
  66
  86
  106
  128
  150
  174
  199
  224
  251
  280
  309
  340
  373
  406
  441
  477
  515
  555
  596
  639
  683
  730
  779
  830
  883
  939
  997
Change in working capital, $m
  34
  5
  6
  6
  7
  7
  8
  8
  9
  9
  9
  10
  10
  11
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  16
  17
  18
  18
  19
  20
  21
Cash from operations, $m
  45
  5
  26
  42
  60
  78
  98
  119
  142
  165
  190
  214
  241
  269
  298
  329
  361
  394
  428
  464
  501
  540
  581
  623
  667
  713
  761
  811
  864
  918
  976
Maintenance CAPEX, $m
  0
  -10
  -12
  -14
  -16
  -18
  -20
  -23
  -25
  -28
  -31
  -34
  -37
  -40
  -43
  -47
  -50
  -54
  -58
  -62
  -66
  -71
  -75
  -80
  -85
  -90
  -95
  -101
  -107
  -113
  -119
New CAPEX, $m
  -11
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -29
  -30
  -31
  -32
  -34
  -35
  -36
  -38
  -39
  -41
  -43
  -45
  -47
  -49
  -51
  -53
Cash from investing activities, $m
  -8
  -24
  -27
  -30
  -33
  -36
  -39
  -43
  -47
  -51
  -55
  -59
  -63
  -67
  -71
  -76
  -80
  -85
  -90
  -96
  -101
  -107
  -113
  -119
  -126
  -133
  -140
  -148
  -156
  -164
  -172
Free cash flow, $m
  37
  -19
  0
  13
  27
  42
  59
  76
  95
  115
  136
  156
  179
  203
  227
  253
  280
  309
  338
  368
  400
  433
  468
  504
  541
  580
  621
  664
  708
  755
  804
Issuance/(repayment) of debt, $m
  -16
  28
  31
  33
  35
  38
  40
  42
  44
  47
  49
  51
  53
  55
  57
  60
  62
  64
  67
  70
  72
  75
  78
  81
  85
  88
  92
  96
  100
  105
  109
Issuance/(repurchase) of shares, $m
  19
  7
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  2
  35
  31
  33
  35
  38
  40
  42
  44
  47
  49
  51
  53
  55
  57
  60
  62
  64
  67
  70
  72
  75
  78
  81
  85
  88
  92
  96
  100
  105
  109
Total cash flow (excl. dividends), $m
  38
  9
  30
  46
  62
  80
  99
  119
  140
  161
  184
  207
  232
  258
  285
  313
  342
  373
  405
  438
  472
  508
  546
  585
  626
  669
  713
  760
  809
  860
  913
Retained Cash Flow (-), $m
  -11
  -16
  -18
  -19
  -20
  -22
  -23
  -24
  -26
  -27
  -28
  -29
  -31
  -32
  -33
  -34
  -36
  -37
  -39
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -53
  -56
  -58
  -60
  -63
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  0
  13
  27
  42
  58
  76
  94
  114
  135
  156
  177
  201
  226
  252
  279
  307
  336
  366
  398
  431
  465
  501
  538
  577
  618
  660
  704
  751
  799
  850
Discount rate, %
 
  6.80
  7.14
  7.50
  7.87
  8.27
  8.68
  9.11
  9.57
  10.05
  10.55
  11.08
  11.63
  12.21
  12.82
  13.46
  14.14
  14.84
  15.59
  16.37
  17.18
  18.04
  18.94
  19.89
  20.89
  21.93
  23.03
  24.18
  25.39
  26.66
  27.99
PV of cash for distribution, $m
 
  0
  11
  21
  31
  39
  46
  51
  55
  57
  57
  56
  54
  51
  46
  42
  37
  32
  27
  22
  18
  14
  11
  8
  6
  4
  3
  2
  1
  1
  1
Current shareholders' claim on cash, %
  100
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5
  97.5

Sterling Construction Company, Inc., together with its subsidiaries, operates as a heavy civil construction company in Texas, Utah, Nevada, Colorado, Arizona, California, Hawaii, and other states in the United States. The company builds, repairs, and reconstructs transportation infrastructure projects, including highways, roads, bridges, airfields, ports, and light rail; and water infrastructure projects comprising water, wastewater, and storm drainage systems. It primarily serves the departments of transportation in various states, regional transit authorities, airport authorities, port authorities, water authorities, and railroads. The company was formerly known as Oakhurst Company, Inc. and changed its name to Sterling Construction Company, Inc. in November 2001. Sterling Construction Company, Inc. was founded in 1955 and is headquartered in The Woodlands, Texas.

FINANCIAL RATIOS  of  Sterling Construction (STRL)

Valuation Ratios
P/E Ratio -30.5
Price to Sales 0.4
Price to Book 2.6
Price to Tangible Book
Price to Cash Flow 6.1
Price to Free Cash Flow 8.1
Growth Rates
Sales Growth Rate 10.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 37.5%
Cap. Spend. - 3 Yr. Gr. Rate -6%
Financial Strength
Quick Ratio 11
Current Ratio 0.3
LT Debt to Equity 0.9%
Total Debt to Equity 4.7%
Interest Coverage -1
Management Effectiveness
Return On Assets -2.1%
Ret/ On Assets - 3 Yr. Avg. -3.7%
Return On Total Capital -7.9%
Ret/ On T. Cap. - 3 Yr. Avg. -9.4%
Return On Equity -8.9%
Return On Equity - 3 Yr. Avg. -11.3%
Asset Turnover 2.4
Profitability Ratios
Gross Margin 6.4%
Gross Margin - 3 Yr. Avg. 5.3%
EBITDA Margin 1.7%
EBITDA Margin - 3 Yr. Avg. 1.4%
Operating Margin -0.7%
Oper. Margin - 3 Yr. Avg. -1.2%
Pre-Tax Margin -1%
Pre-Tax Margin - 3 Yr. Avg. -1.5%
Net Profit Margin -1.3%
Net Profit Margin - 3 Yr. Avg. -2%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 0%

STRL stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the STRL stock intrinsic value calculation we used $624 million for the last fiscal year's total revenue generated by Sterling Construction. The default revenue input number comes from 2016 income statement of Sterling Construction. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our STRL stock valuation model: a) initial revenue growth rate of 17% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 6.8%, whose default value for STRL is calculated based on our internal credit rating of Sterling Construction, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Sterling Construction.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of STRL stock the variable cost ratio is equal to 79.2%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $148 million in the base year in the intrinsic value calculation for STRL stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 10.3% for Sterling Construction.

Corporate tax rate of 27% is the nominal tax rate for Sterling Construction. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the STRL stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for STRL are equal to 12.9%.

Life of production assets of 8 years is the average useful life of capital assets used in Sterling Construction operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for STRL is equal to 5.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $96 million for Sterling Construction - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 24.04 million for Sterling Construction is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Sterling Construction at the current share price and the inputted number of shares is $0.3 billion.


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COMPANY NEWS

▶ Sterling Construction reports 1Q loss   [May-02-17 06:59PM  Associated Press]
▶ Heavy civil construction company names new CEO   [04:15PM  American City Business Journals]
▶ Sterling Construction reports 4Q loss   [06:34AM  Associated Press]
▶ Hedge Funds Are Buying Sterling Construction Company, Inc. (STRL)   [Dec-14-16 02:01AM  at Insider Monkey]
Stock chart of STRL Financial statements of STRL Annual reports of STRL
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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