Sterling Construction Reports Loss in Q3, Shares Down - Analyst Blog

Sterling Construction Co. Inc. (STRL) reported a loss of 21 cents per share in third-quarter 2014, wider than the prior-year quarter's loss of 6 cents per share. Analysts polled by Zacks were expecting earnings of 21 cents per share on an average. Impact of unanticipated charges associated with the completion of three large projects and increased general and administrative expenses led to the dismal performance. This resulted in a 5.4% drop in the company's share price, which closed at $8.54 yesterday.

Operational Update    

Sales edged up 2% year over year to $189 million in the quarter, falling short of the Zacks Consensus Estimate of $210 million. The improvement was mainly driven by an increased number of projects in progress, particularly in the California market.

Cost of sales increased 2% year over year to $181 million. Gross profit during the quarter remained flat with the prior-year quarter at $8.4 million. Gross profit in the quarter was affected by downward revisions of gross profit on three projects - two in Texas and one in California.

Gross margin in the quarter was 4.4% compared with 4.5% in the prior-year quarter. Excluding the impact of these three projects, gross margin would have been 6.2%.

General and administrative expenses increased 14% to $9.3 million compared with the year-ago quarter owing to slightly higher headcount and employee benefit costs, along with a one-time decrease in employee benefit costs in the prior-year quarter.  Operating loss in the reported quarter was $1.6 million as against an operating profit of $1.7 million in the prior-year quarter.

Bookings and Backlog

During the third quarter, bookings were at $176 million, representing a book-to-bill ratio of 0.93:1. As of Sep 30, 2014, total backlog was $759 million, up 4% sequentially and 9% year over year. The total backlog, however, excluded $82 million worth of projects where Sterling Construction was apparently a low bidder and was not awarded the contract.

Financial Update

Cash and cash equivalents were $17 million as of Sep 30, 2014, compared with $1.9 million as of 2013-end. Long-term debt amounted to $36.8 million as of Sep 30, 2014, compared with $8.3 million as of Dec 31, 2013. The debt-to-capitalization ratio increased to 20% as of Sep 30, 2014 compared with 6% as of Dec 31, 2013.

Outlook

Sterling Construction anticipates growth in revenues for the fourth quarter of 2014 based on the execution of existing projects and new awards. Gross margin is expected to return to first half 2014 levels based on the much improved margin profile of its backlog. Sterling Construction continues to take actions to negate the effects of spot shortages of commodities, over-stretched sub-contractors and vendors, and heavy competition for craft labor, particularly in its Texas market. In addition to craft labor shortages, the company is facing significant wage inflation in some of its Texas sub-markets. The company forecasts general and administrative expenses to remain in the mid 5% of revenues.

Moreover, Sterling Construction's backlog has expanded to record high levels as it continues to book attractive construction opportunities in its core markets, such as the CalTrans Route 101 award and the Phoenix Sky Harbor Airport win. This bodes well for performance in the fourth quarter.

Houston, TX-based Sterling Construction is a leading heavy civil construction company engaged in building and reconstruction of transportation and water infrastructure projects in Texas, Utah, Nevada, Arizona, California and other states. Its transportation infrastructure projects include highways, roads, bridges, and light rail; and its water infrastructure projects comprise water, wastewater, and storm drainage systems.

Sterling Construction currently carries a Zacks Rank #3 (Hold).

Peer Performance
 
Among Sterling Construction's peers, MasTec, Inc. (MTZ) reported third-quarter 2014 adjusted earnings (excluding one-time items barring non-cash stock compensation expense) of 53 cents per share on Oct 30, down from 59 cents earned in the year-ago quarter. Earnings were in line with the Zacks Consensus Estimate but below management's guidance of 56 cents.

Chicago Bridge & Iron (CBI) reported adjusted earnings of $1.51 per share, which surpassed the Zacks Consensus Estimate of $1.39 per share by 8.63%. The bottom line also marked an increase of 34.8% from $1.12 a share earned in the prior-year quarter.

Tutor Perini Corporation (TPC) reported earnings per share of 73 cents, up 49% from 49 cents in the year-ago quarter but short of the Zacks Consensus Estimate of 75 cents.