Intrinsic value of Sterling Construction - STRL

Previous Close

$9.76

  Intrinsic Value

$55.62

stock screener

  Rating & Target

str. buy

+470%

  Value-price divergence*

+94%

Previous close

$9.76

 
Intrinsic value

$55.62

 
Up/down potential

+470%

 
Rating

str. buy

 
Value-price divergence*

+94%

*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 0.2

 

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
  20.50
  18.95
  17.56
  16.30
  15.17
  14.15
  13.24
  12.41
  11.67
  11.01
  10.40
  9.86
  9.38
  8.94
  8.55
  8.19
  7.87
  7.58
  7.33
  7.09
  6.88
  6.70
  6.53
  6.37
  6.24
  6.11
  6.00
  5.90
  5.81
  5.73
Revenue, $m
  690
  831
  989
  1,163
  1,352
  1,557
  1,778
  2,013
  2,263
  2,527
  2,805
  3,097
  3,402
  3,721
  4,054
  4,401
  4,761
  5,136
  5,525
  5,930
  6,351
  6,788
  7,243
  7,715
  8,207
  8,719
  9,252
  9,807
  10,386
  10,989
  11,619
Variable operating expenses, $m
 
  717
  852
  1,001
  1,163
  1,339
  1,527
  1,729
  1,943
  2,169
  2,407
  2,651
  2,913
  3,186
  3,470
  3,767
  4,076
  4,396
  4,730
  5,076
  5,437
  5,811
  6,200
  6,605
  7,026
  7,464
  7,920
  8,395
  8,891
  9,407
  9,946
Fixed operating expenses, $m
 
  104
  106
  109
  111
  114
  117
  120
  123
  126
  129
  133
  136
  139
  143
  146
  150
  154
  158
  161
  166
  170
  174
  178
  183
  187
  192
  197
  202
  207
  212
Total operating expenses, $m
  695
  821
  958
  1,110
  1,274
  1,453
  1,644
  1,849
  2,066
  2,295
  2,536
  2,784
  3,049
  3,325
  3,613
  3,913
  4,226
  4,550
  4,888
  5,237
  5,603
  5,981
  6,374
  6,783
  7,209
  7,651
  8,112
  8,592
  9,093
  9,614
  10,158
Operating income, $m
  -5
  11
  31
  53
  78
  104
  133
  164
  197
  232
  269
  313
  354
  397
  441
  487
  536
  586
  638
  692
  749
  808
  869
  933
  999
  1,068
  1,140
  1,215
  1,294
  1,375
  1,461
EBITDA, $m
  11
  25
  46
  71
  97
  126
  157
  190
  226
  264
  303
  345
  389
  435
  483
  533
  585
  639
  695
  753
  814
  878
  943
  1,012
  1,083
  1,158
  1,235
  1,316
  1,401
  1,489
  1,581
Interest expense (income), $m
  3
  0
  10
  20
  32
  44
  58
  72
  88
  105
  122
  141
  160
  180
  201
  224
  247
  271
  295
  321
  348
  376
  405
  435
  467
  499
  533
  569
  606
  644
  684
Earnings before tax, $m
  -7
  10
  21
  33
  46
  60
  76
  92
  109
  128
  147
  173
  194
  216
  239
  264
  289
  315
  343
  371
  401
  432
  464
  497
  532
  569
  607
  647
  688
  731
  777
Tax expense, $m
  0
  3
  6
  9
  12
  16
  20
  25
  29
  34
  40
  47
  52
  58
  65
  71
  78
  85
  92
  100
  108
  117
  125
  134
  144
  154
  164
  175
  186
  198
  210
Net income, $m
  -9
  8
  15
  24
  34
  44
  55
  67
  80
  93
  107
  126
  142
  158
  175
  193
  211
  230
  250
  271
  293
  315
  339
  363
  389
  415
  443
  472
  502
  534
  567

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
  312
  371
  436
  508
  585
  667
  756
  849
  949
  1,053
  1,162
  1,277
  1,397
  1,522
  1,652
  1,787
  1,928
  2,074
  2,226
  2,384
  2,548
  2,719
  2,896
  3,081
  3,273
  3,473
  3,681
  3,899
  4,125
  4,362
Adjusted assets (=assets-cash), $m
  259
  312
  371
  436
  508
  585
  667
  756
  849
  949
  1,053
  1,162
  1,277
  1,397
  1,522
  1,652
  1,787
  1,928
  2,074
  2,226
  2,384
  2,548
  2,719
  2,896
  3,081
  3,273
  3,473
  3,681
  3,899
  4,125
  4,362
Revenue / Adjusted assets
  2.664
  2.663
  2.666
  2.667
  2.661
  2.662
  2.666
  2.663
  2.665
  2.663
  2.664
  2.665
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
  2.664
Average production assets, $m
  71
  86
  102
  120
  139
  160
  183
  207
  233
  260
  289
  319
  350
  383
  418
  453
  490
  529
  569
  611
  654
  699
  746
  795
  845
  898
  953
  1,010
  1,070
  1,132
  1,197
Working capital, $m
  29
  -12
  -14
  -16
  -19
  -22
  -25
  -28
  -32
  -35
  -39
  -43
  -48
  -52
  -57
  -62
  -67
  -72
  -77
  -83
  -89
  -95
  -101
  -108
  -115
  -122
  -130
  -137
  -145
  -154
  -163
Total debt, $m
  5
  40
  84
  132
  184
  241
  302
  367
  436
  509
  586
  667
  751
  840
  932
  1,027
  1,127
  1,231
  1,339
  1,451
  1,567
  1,688
  1,814
  1,944
  2,081
  2,222
  2,370
  2,523
  2,683
  2,850
  3,024
Total liabilities, $m
  194
  230
  274
  322
  374
  431
  492
  557
  626
  699
  776
  857
  941
  1,030
  1,122
  1,217
  1,317
  1,421
  1,529
  1,641
  1,757
  1,878
  2,004
  2,134
  2,271
  2,412
  2,560
  2,713
  2,873
  3,040
  3,214
Total equity, $m
  107
  82
  98
  115
  133
  154
  175
  199
  223
  249
  277
  306
  336
  367
  400
  434
  470
  507
  545
  585
  627
  670
  715
  762
  810
  861
  913
  968
  1,025
  1,085
  1,147
Total liabilities and equity, $m
  301
  312
  372
  437
  507
  585
  667
  756
  849
  948
  1,053
  1,163
  1,277
  1,397
  1,522
  1,651
  1,787
  1,928
  2,074
  2,226
  2,384
  2,548
  2,719
  2,896
  3,081
  3,273
  3,473
  3,681
  3,898
  4,125
  4,361
Debt-to-equity ratio
  0.047
  0.490
  0.860
  1.150
  1.380
  1.570
  1.720
  1.850
  1.950
  2.040
  2.120
  2.180
  2.240
  2.290
  2.330
  2.360
  2.400
  2.430
  2.450
  2.480
  2.500
  2.520
  2.540
  2.550
  2.570
  2.580
  2.590
  2.610
  2.620
  2.630
  2.640
Adjusted equity ratio
  0.247
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263
  0.263

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -9
  8
  15
  24
  34
  44
  55
  67
  80
  93
  107
  126
  142
  158
  175
  193
  211
  230
  250
  271
  293
  315
  339
  363
  389
  415
  443
  472
  502
  534
  567
Depreciation, amort., depletion, $m
  16
  14
  16
  17
  19
  22
  24
  26
  29
  32
  34
  32
  35
  38
  42
  45
  49
  53
  57
  61
  65
  70
  75
  79
  85
  90
  95
  101
  107
  113
  120
Funds from operations, $m
  79
  22
  31
  42
  53
  66
  79
  93
  109
  125
  142
  158
  177
  196
  217
  238
  260
  283
  307
  332
  358
  385
  413
  442
  473
  505
  538
  573
  609
  647
  687
Change in working capital, $m
  34
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
Cash from operations, $m
  45
  24
  33
  44
  56
  68
  82
  97
  112
  128
  146
  162
  181
  201
  221
  243
  265
  288
  312
  338
  364
  391
  419
  449
  480
  512
  546
  581
  617
  656
  696
Maintenance CAPEX, $m
  0
  -7
  -9
  -10
  -12
  -14
  -16
  -18
  -21
  -23
  -26
  -29
  -32
  -35
  -38
  -42
  -45
  -49
  -53
  -57
  -61
  -65
  -70
  -75
  -79
  -85
  -90
  -95
  -101
  -107
  -113
New CAPEX, $m
  -11
  -15
  -16
  -18
  -20
  -21
  -23
  -24
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -53
  -55
  -57
  -60
  -62
  -65
Cash from investing activities, $m
  -8
  -22
  -25
  -28
  -32
  -35
  -39
  -42
  -47
  -50
  -55
  -59
  -63
  -68
  -72
  -78
  -82
  -88
  -93
  -99
  -104
  -110
  -117
  -124
  -130
  -138
  -145
  -152
  -161
  -169
  -178
Free cash flow, $m
  37
  2
  9
  16
  24
  33
  43
  54
  66
  78
  91
  103
  118
  133
  149
  165
  183
  201
  219
  239
  259
  281
  303
  326
  350
  375
  401
  428
  457
  486
  518
Issuance/(repayment) of debt, $m
  -16
  39
  44
  48
  52
  57
  61
  65
  69
  73
  77
  81
  85
  88
  92
  96
  100
  104
  108
  112
  116
  121
  126
  131
  136
  142
  147
  154
  160
  167
  174
Issuance/(repurchase) of shares, $m
  19
  6
  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
  45
  44
  48
  52
  57
  61
  65
  69
  73
  77
  81
  85
  88
  92
  96
  100
  104
  108
  112
  116
  121
  126
  131
  136
  142
  147
  154
  160
  167
  174
Total cash flow (excl. dividends), $m
  38
  47
  52
  64
  77
  90
  104
  119
  135
  151
  168
  184
  202
  221
  241
  261
  282
  304
  327
  351
  376
  402
  429
  457
  486
  516
  548
  582
  617
  653
  692
Retained Cash Flow (-), $m
  -11
  -14
  -16
  -17
  -19
  -20
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -31
  -33
  -34
  -36
  -37
  -38
  -40
  -42
  -43
  -45
  -47
  -49
  -51
  -53
  -55
  -57
  -60
  -62
Prev. year cash balance distribution, $m
 
  39
  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
 
  72
  37
  47
  58
  70
  82
  96
  110
  125
  140
  155
  172
  190
  208
  227
  247
  267
  289
  311
  334
  358
  384
  410
  437
  466
  496
  527
  560
  594
  630
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  69
  34
  41
  48
  54
  60
  65
  69
  72
  74
  74
  73
  72
  70
  67
  63
  58
  53
  48
  42
  37
  32
  27
  22
  18
  14
  11
  9
  6
  5
Current shareholders' claim on cash, %
  100
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8
  95.8

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 -27.1
Price to Sales 0.4
Price to Book 2.3
Price to Tangible Book
Price to Cash Flow 5.4
Price to Free Cash Flow 7.2
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 $690 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 20.5% 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 4.3%, 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 86.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $101 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 24% 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 10.3%.

Life of production assets of 10 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 -1.4%. 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 - $107 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 $0.2 billion.

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COMPANY NEWS

▶ Sterling Construction posts 2Q profit   [12:23AM  Associated Press]
▶ 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
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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