Sterling Construction's Earnings Lag Est

Sterling Construction Co. Inc. (STRL) swung to profit in the fourth quarter of 2012 with earnings of 1 cent per share, compared with a loss of $2.72 per share in the year-ago quarter. However, reported earnings fell short of the Zacks Consensus Estimate of 4 cents.

Operational Update

Sales increased 39% year over year to $158 million in the quarter, missing the Zacks Consensus Estimate of $162 million. The year-over-year improvement was driven by higher activity levels in most of the geographic regions, particularly Calif. and Texas.

Gross profit during the quarter increased almost fourfold to $16.3 million from $3.9 million in the prior-year quarter. Gross margin expanded 690 basis points to 10.3% in the quarter, banking on Utah and Texas projects.

General and administrative expenses surged 71% to $9.1 million, driven by higher revenues as well as higher compensation expense related to recent executive appointments and higher professional fees. Operating income was $7.2 million compared with an operating loss of $1.5 million in the prior-year quarter. Operating margin plunged 180 basis points to 2.3% in the quarter. Including direct costs of acquisitions, provision for loss on lawsuit and goodwill impairment, operating income in the quarter was $7.1 million compared with an operating loss of $69 million in the prior-year quarter.

Fiscal 2012 Performance

Sterling Construction reported loss per share of 26 cents in 2012, narrower than the year-ago loss per share of $2.24. Revenues increased 26% year over year to $631 million.

Financial Update

As of 2012 end, Sterling Construction had cash and cash equivalents of $3.1 million, down from $16.4 million as of 2012 end. Long-term debt increased to $24.2 million as of 2012-end from $0.2 million as of 2011-end. Capital expenditures increased to $37.4 million in 2012 from $24.0 million in 2011, driven by Sterling Construction’s investments to support higher level of operations and to replace older equipments. Sterling Construction continues to dispose underutilized and aging equipment, and has generated proceeds of $12.5 million from the sale of property and equipment in 2012.

During the fourth quarter, Sterling Construction had been awarded contracts worth $131 million, compared with $119 million in prior-year quarter. Awards in 2012 (excluding acquired contracts) totaled $643 million, up 8% from 2011 awards. Total backlog as of 2012-end stood at $704 million compared with $616 million as of 2011 end.

Outlook

Sterling Construction expects organic revenue growth in 2013 to be constrained due to concerns regarding government funding. Completion of certain projects in Texas, which had dragged margins in 2012 due to operational issues, will lead to improvement in margins through 2013. For 2013, SG&A, as a percentage of revenues, should be comparable to 2012, but higher in dollars. Capital expenditures are projected to be similar to the 2011 levels.

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

Sterling Construction currently retains a Zacks Rank #3 (Hold). Other stocks to consider in the same industry with favorable Zacks Ranks are Orion Marine Group Inc. (ORN) with a Zacks Rank #1 (Strong Buy), and Chicago Bridge & Iron (CBI) and AECOM Technology Corporation (ACM) with a Zacks Rank #2 (Buy).