Intrinsic value of Sterling Construction - STRL

Previous Close

$13.20

  Intrinsic Value

$23.17

stock screener

  Rating & Target

str. buy

+76%

Previous close

$13.20

 
Intrinsic value

$23.17

 
Up/down potential

+76%

 
Rating

str. buy

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 0001), $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 0.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  9.10
  8.69
  8.32
  7.99
  7.69
  7.42
  7.18
  6.96
  6.76
  6.59
  6.43
  6.29
  6.16
  6.04
  5.94
  5.84
  5.76
  5.68
  5.62
  5.55
  5.50
  5.45
  5.40
  5.36
  5.33
  5.29
  5.26
  5.24
  5.21
  5.19
Revenue, $m
  1,045
  1,136
  1,230
  1,329
  1,431
  1,537
  1,648
  1,762
  1,881
  2,005
  2,134
  2,268
  2,408
  2,554
  2,705
  2,863
  3,028
  3,200
  3,380
  3,568
  3,764
  3,969
  4,184
  4,408
  4,643
  4,889
  5,146
  5,416
  5,698
  5,994
Variable operating expenses, $m
  923
  1,002
  1,084
  1,170
  1,259
  1,351
  1,447
  1,547
  1,651
  1,759
  1,858
  1,975
  2,096
  2,223
  2,355
  2,492
  2,636
  2,786
  2,942
  3,106
  3,276
  3,455
  3,642
  3,837
  4,041
  4,255
  4,479
  4,714
  4,960
  5,217
Fixed operating expenses, $m
  89
  91
  93
  95
  97
  99
  101
  104
  106
  108
  111
  113
  115
  118
  121
  123
  126
  129
  132
  134
  137
  140
  144
  147
  150
  153
  157
  160
  164
  167
Total operating expenses, $m
  1,012
  1,093
  1,177
  1,265
  1,356
  1,450
  1,548
  1,651
  1,757
  1,867
  1,969
  2,088
  2,211
  2,341
  2,476
  2,615
  2,762
  2,915
  3,074
  3,240
  3,413
  3,595
  3,786
  3,984
  4,191
  4,408
  4,636
  4,874
  5,124
  5,384
Operating income, $m
  34
  43
  54
  64
  75
  87
  99
  112
  125
  139
  166
  181
  197
  213
  230
  248
  266
  286
  306
  328
  350
  374
  399
  425
  452
  480
  510
  542
  575
  610
EBITDA, $m
  60
  70
  82
  94
  106
  119
  133
  147
  161
  177
  193
  209
  227
  245
  264
  283
  304
  326
  349
  372
  397
  423
  451
  479
  509
  541
  574
  609
  646
  684
Interest expense (income), $m
  3
  18
  24
  31
  37
  44
  51
  58
  66
  74
  82
  91
  100
  109
  118
  128
  139
  150
  161
  173
  185
  198
  212
  226
  241
  256
  272
  289
  307
  326
  345
Earnings before tax, $m
  15
  19
  23
  27
  31
  36
  41
  46
  51
  57
  75
  81
  88
  95
  102
  109
  117
  125
  133
  143
  152
  162
  173
  184
  196
  208
  221
  235
  249
  264
Tax expense, $m
  4
  5
  6
  7
  8
  10
  11
  12
  14
  15
  20
  22
  24
  26
  27
  29
  32
  34
  36
  38
  41
  44
  47
  50
  53
  56
  60
  63
  67
  71
Net income, $m
  11
  14
  17
  20
  23
  26
  30
  33
  37
  41
  55
  59
  64
  69
  74
  80
  85
  91
  97
  104
  111
  118
  126
  134
  143
  152
  161
  171
  182
  193

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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
Total assets, $m
  505
  549
  595
  643
  692
  743
  797
  852
  910
  970
  1,032
  1,097
  1,164
  1,235
  1,308
  1,385
  1,464
  1,548
  1,635
  1,725
  1,820
  1,919
  2,023
  2,132
  2,245
  2,364
  2,488
  2,619
  2,755
  2,898
Adjusted assets (=assets-cash), $m
  505
  549
  595
  643
  692
  743
  797
  852
  910
  970
  1,032
  1,097
  1,164
  1,235
  1,308
  1,385
  1,464
  1,548
  1,635
  1,725
  1,820
  1,919
  2,023
  2,132
  2,245
  2,364
  2,488
  2,619
  2,755
  2,898
Revenue / Adjusted assets
  2.069
  2.069
  2.067
  2.067
  2.068
  2.069
  2.068
  2.068
  2.067
  2.067
  2.068
  2.067
  2.069
  2.068
  2.068
  2.067
  2.068
  2.067
  2.067
  2.068
  2.068
  2.068
  2.068
  2.068
  2.068
  2.068
  2.068
  2.068
  2.068
  2.068
Average production assets, $m
  117
  127
  138
  149
  160
  172
  185
  197
  211
  225
  239
  254
  270
  286
  303
  321
  339
  358
  379
  400
  422
  445
  469
  494
  520
  548
  576
  607
  638
  671
Working capital, $m
  18
  19
  21
  23
  24
  26
  28
  30
  32
  34
  36
  39
  41
  43
  46
  49
  51
  54
  57
  61
  64
  67
  71
  75
  79
  83
  87
  92
  97
  102
Total debt, $m
  119
  150
  182
  215
  249
  285
  322
  360
  400
  442
  485
  531
  577
  626
  677
  730
  786
  844
  904
  967
  1,033
  1,102
  1,174
  1,250
  1,329
  1,411
  1,498
  1,588
  1,683
  1,783
Total liabilities, $m
  351
  382
  414
  447
  481
  517
  554
  592
  632
  674
  717
  762
  809
  858
  909
  962
  1,018
  1,076
  1,136
  1,199
  1,265
  1,334
  1,406
  1,481
  1,560
  1,643
  1,729
  1,820
  1,915
  2,014
Total equity, $m
  154
  168
  181
  196
  211
  227
  243
  260
  277
  296
  315
  335
  355
  377
  399
  422
  447
  472
  499
  526
  555
  585
  617
  650
  685
  721
  759
  799
  840
  884
Total liabilities and equity, $m
  505
  550
  595
  643
  692
  744
  797
  852
  909
  970
  1,032
  1,097
  1,164
  1,235
  1,308
  1,384
  1,465
  1,548
  1,635
  1,725
  1,820
  1,919
  2,023
  2,131
  2,245
  2,364
  2,488
  2,619
  2,755
  2,898
Debt-to-equity ratio
  0.770
  0.890
  1.000
  1.100
  1.180
  1.260
  1.320
  1.390
  1.440
  1.490
  1.540
  1.590
  1.630
  1.660
  1.700
  1.730
  1.760
  1.790
  1.810
  1.840
  1.860
  1.880
  1.900
  1.920
  1.940
  1.960
  1.970
  1.990
  2.000
  2.020
Adjusted equity ratio
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305
  0.305

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  11
  14
  17
  20
  23
  26
  30
  33
  37
  41
  55
  59
  64
  69
  74
  80
  85
  91
  97
  104
  111
  118
  126
  134
  143
  152
  161
  171
  182
  193
Depreciation, amort., depletion, $m
  26
  27
  28
  30
  31
  32
  34
  35
  36
  38
  27
  28
  30
  32
  34
  36
  38
  40
  42
  44
  47
  49
  52
  55
  58
  61
  64
  67
  71
  75
Funds from operations, $m
  37
  41
  45
  49
  54
  58
  63
  68
  74
  79
  82
  88
  94
  101
  108
  115
  123
  131
  139
  148
  158
  168
  178
  189
  201
  213
  225
  239
  253
  268
Change in working capital, $m
  1
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  3
  3
  3
  4
  4
  4
  4
  4
  5
  5
  5
Cash from operations, $m
  35
  39
  43
  48
  52
  57
  61
  66
  72
  77
  79
  85
  92
  98
  105
  112
  120
  128
  136
  145
  154
  164
  174
  185
  197
  208
  221
  234
  248
  263
Maintenance CAPEX, $m
  -12
  -13
  -14
  -15
  -17
  -18
  -19
  -21
  -22
  -23
  -25
  -27
  -28
  -30
  -32
  -34
  -36
  -38
  -40
  -42
  -44
  -47
  -49
  -52
  -55
  -58
  -61
  -64
  -67
  -71
New CAPEX, $m
  -10
  -10
  -11
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -28
  -29
  -30
  -32
  -33
Cash from investing activities, $m
  -22
  -23
  -25
  -26
  -28
  -30
  -31
  -34
  -35
  -37
  -39
  -42
  -44
  -46
  -49
  -52
  -54
  -57
  -60
  -63
  -66
  -70
  -73
  -77
  -81
  -86
  -90
  -94
  -99
  -104
Free cash flow, $m
  14
  16
  19
  21
  24
  27
  30
  33
  36
  40
  40
  44
  48
  52
  56
  61
  66
  71
  76
  82
  88
  94
  101
  108
  115
  123
  131
  140
  149
  159
Issuance/(repayment) of debt, $m
  29
  31
  32
  33
  34
  36
  37
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  58
  60
  63
  66
  69
  72
  75
  79
  83
  86
  91
  95
  99
Issuance/(repurchase) of shares, $m
  2
  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  
  31
  31
  32
  33
  34
  36
  37
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  58
  60
  63
  66
  69
  72
  75
  79
  83
  86
  91
  95
  99
Total cash flow (excl. dividends), $m
  45
  47
  50
  54
  58
  63
  67
  72
  76
  82
  83
  89
  95
  101
  107
  114
  121
  129
  137
  145
  154
  163
  173
  183
  194
  206
  218
  231
  244
  258
Retained Cash Flow (-), $m
  -13
  -13
  -14
  -14
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -21
  -22
  -23
  -24
  -25
  -27
  -28
  -29
  -30
  -32
  -33
  -35
  -36
  -38
  -40
  -42
  -44
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
  32
  33
  36
  40
  43
  47
  51
  55
  59
  63
  64
  69
  74
  79
  85
  91
  97
  104
  110
  118
  125
  133
  141
  150
  160
  169
  180
  191
  202
  214
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
  31
  30
  32
  33
  34
  34
  34
  34
  34
  33
  31
  30
  28
  27
  25
  23
  21
  19
  17
  15
  13
  11
  9
  8
  6
  5
  4
  3
  2
  2
Current shareholders' claim on cash, %
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
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  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
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  99.5
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  99.5
  99.5
  99.5

Sterling Construction Company, Inc. is a heavy civil construction company engaged in the building and reconstruction of transportation and water infrastructure projects in Texas, Utah, Nevada, Arizona, California, Hawaii and other states. The Company's transportation infrastructure projects include highways, roads, bridges, airfields, ports and light rail. Its water infrastructure projects include water, wastewater and storm drainage systems. The Company operates through heavy civil construction segment. The Company provides its services by using traditional general contracting arrangements, such as lump sum contracts and cost-plus contracts. The Company serves various markets in the United States, including Texas, Utah, Nevada, Arizona, California and Hawaii. The Company's customers include departments of transportation in various states (DOTs), regional transit authorities, airport authorities, port authorities, water authorities and railroads.

FINANCIAL RATIOS  of  Sterling Construction (STRL)

Valuation Ratios
P/E Ratio -36.7
Price to Sales 0.5
Price to Book 3.1
Price to Tangible Book
Price to Cash Flow 7.3
Price to Free Cash Flow 9.7
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
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 $957.958 million for the last fiscal year's total revenue generated by Sterling Construction. The default revenue input number comes from 0001 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 9.1% 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 88.4%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $87 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 20.5% 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 11.2%.

Life of production assets of 9 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 1.7%. 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 - $141.333 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 27.064 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 $0.4 billion.

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COMPANY NEWS

▶ Sterling Construction: 3Q Earnings Snapshot   [Nov-05-18 06:43PM  Associated Press]
▶ Houston City Council approves $18.8M for spaceports Phase 1 infrastructure   [Oct-17-18 03:01PM  American City Business Journals]
▶ Sterling Construction: 2Q Earnings Snapshot   [06:28PM  Associated Press]
▶ US New-Home Sales Hit 6-Month High: 4 Hot Picks   [Jun-26-18 08:49AM  Zacks]
▶ Sterling Construction: 1Q Earnings Snapshot   [May-07-18 05:07PM  Associated Press]
▶ Sterling Construction posts 4Q profit   [Mar-05-18 05:13PM  Associated Press]
▶ 5 Stocks That Look Good Short   [Jan-28-18 02:00PM  TheStreet.com]
▶ Sterling Construction Announces a Director Retirement   [Dec-06-17 04:05PM  Business Wire]
▶ Top-Rated Stocks: Sterling Construction Sees Composite Rating Climb To 97   [Nov-08-17 03:00AM  Investor's Business Daily]
▶ Sterling Consolidated Corp. to Host Earnings Call   [Oct-31-17 07:26AM  ACCESSWIRE]
▶ Sterling Construction posts 3Q profit   [Oct-30-17 06:07PM  Associated Press]

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