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I typically look for stocks enjoying specific insider buying that are over $250M in marketcap. This week's pick, Sterling Construction Company (STRL) clocks in at under that threshold (around $150M) but was a significantly larger firm during 2007-2010.

Methodology

My methodology uses insider trading data from Bluetrader. I monitor hundreds of weekly trades, looking for interesting stories that may slip between the cracks and publish these in my free weekly insider trading newsletter. When you subscribe, you can get a feel for the methodology I use by downloading a free ebook there, The Harvard Guide to Insider Trading.

Trigger Event

On March 20, 2012, Elizabeth Brumley, STRL's recently appointed CFO and Chief Accounting Officer, purchased 5300 shares on the open market, or about $50,000 worth of Sterling Construction stock. There was no other buying or selling over the past 30 days. I really like to see CFOs buying - they have their fingers on the real financial pulse of a company so it's a particularly bullish sign.

STRL Company Tear Sheet

  • Sterling Construction Company specializes in the building, reconstruction, and repair of transportation (roads, bridges) and water infrastructure (water systems, sewers)
  • Headquartered in Houston, Texas, STRL conducts business through partners and subsidiaries in Texas, Utah, California, Nevada, and Arizona.
  • Stock is down about 50% over the past 5 years while sales and backlog has grown
  • STRL has almost 40% of its market cap in net cash (around $58 million) while also carrying significant goodwill ($120M) from a strategic acquisition strategy

What Sterling Construction Does
In short, Sterling does geographically-focused, large infrastructure contract work. It's strengths derive from experience running large water and transportation projects.

click to enlarge

sterling

Given its expertise and focus on specific locations for projects, the strategy of the firm is to leverage its experience in one geography to find new/more work in another location. So, things like:

  • STRL has done a lot of water infrastructure work in Texas. Now, it's time to find similar work in other states.
  • The firm has done a lot of earth-moving and paving on roadwork projects in Nevada. Sterling is now on the prowl to find transportation infrastructure projects in Utah.

Transportation Infrastructure Trends
Sterling expects government spending to continue at a slow, but consistent growth rate into the future. Population growth is driving some of this but the firm will need to capitalize on new federal transportation bills (if and when) as funding sources.

sterling

Water Infrastructure Spending Strong
STRL expects spending on water infrastructure to surpass GDP growth over the next few years (through 2015, at least). New business is also dependent on size and timing of both federal and municipal spending.

sterling

Estimates on Sterling's Potential Market

  • Texas: $8.3B in spending in 2012/2013 (including $3B of Prop 12 appropriations)
  • Utah: $1.6B in highway spending 2012/2013
  • Nevada: Over $700M 2012/2013
  • Arizona: About $650M over same time period
  • California: $16B over the next two years


So, almost $27B of highway infrastructure projects at stake over the through 2013. Geographic Diversity of Sterling's Operations

There's a lot of potential of infrastructure wins and spend-through in the U.S. Southwest, a geography well-suited for STRL's current business operations. As noted above, Sterling's strategy is to parlay experiences in large-scale infrastructure projects in one geography into new business in another.

sterling

Sterling's Acquisition Strategy
The reason there is so much goodwill on the balance sheet ($120M in the 3rd quarter of 2011) is that Sterling has bought at least 6 firms since 2002. Sterling's acquisition strategy follows:

  • geographic exposure to long-term growth markets
  • history of good margins and growing backlog
  • accretive to EPS
  • strong management


What the $#%^ happened in Q4 2011?

Well, nothing particularly good. Costs of projects ran over while revenues weakened. Plus, the firm took a $67M writedown related to impairment of the goodwill it had built up on its balance sheet. It was just ugly as revenues dropped, costs rose and then you had this big impairment to boot.

sterling

The long case for STRL

Sterling has been caught in a double whammy for the construction industry. New federal funds have been slow in coming, so it's been slim pickings for existing contractors. This leads to competitive pricing which drives down margins on already somewhat lean business. To address the market and its own internal controls, Sterling brought in Brumley (mentioned above - new CFO). She used to be the CFO at Bristow Group ($BRS) - a $1.6B helicopter services firm. She's buying the stock.

So, it's a waiting game. Up until now, Sterling hadn't suffered a quarterly loss since the 1980s. Now, the firm must get a handle on its internal processes, capture the existing business it can, until the federal fund spigot opens again. Until then, Sterling has to rely on its strong financial position and converting some of its growing backlog of business.

If it does, STRL has a lot of room to run. It may even be a nice takeout candidate by one of the larger engineering and construction firms.

What do you think? Will STRL successfully turn itself around? Is that why the CFO is buying the stock?

Let me know in the comments.

Disclaimer: This should definitely not be construed as investment advice. I’ve tried my best to be as faithful to the story as I could, using sound resources to help describe the insider trading activity at leading companies. But you should definitely do your homework — don’t base an investment decision off this information.

Source: Can Sterling Construction Turn Itself Around? Insiders Think So