Sterling Infrastructure is a market-leading infrastructure services provider of e-infrastructure, building and transportation solutions.
Given your market cap has increased fivefold over the past four years, what has contributed to Sterling’s success?
Back in 2016, we initiated a turnaround and began transforming the company from a heavy civil construction business to a diversified infrastructure service provider. We applied our core capabilities to end markets with long-term sustainable growth drivers, including the data center build out, onshoring of manufacturing and major U.S. infrastructure investment. We started our transformation with the turnaround of our Transportation Solutions business, which at the time was doing a lot of low-bid (and low margin) heavy highway work, and moved that business into higher-margin offerings including alternative delivery, aviation, and rail. Through this process, we increased operating margins in this business by over 700 basis points.
As we transformed the Transportation business, we were also acquiring businesses to help build out and grow our other two platforms. Building Solutions, which represents about 20% of sales, focuses on residential and commercial concrete slab construction and has great cash flow and returns.
But our most exciting segment is E-infrastructure which is focused on data centers, which now represent over 40% of our segment backlog, as well as manufacturing and e-commerce distribution. On the manufacturing front we are engaged in battery plants solar panel plants, and small manufacturing facilities and are anticipating a wave of chip plants, pharma, and food processing facilities in the next few years. The shift toward domestic manufacturing was spurred by COVID-19 highlighting supply chain vulnerabilities, and signifies a move towards supply chain security over cost.
The transformation of the business is reflected in our great profitability growth and excellent cash flow over the past several years. As we have delivered strong financial results, investors have taken notice.
As you have moved into new growth segments, how has your offering evolved with it?
We have transitioned from serving purely public end markets, such as Departments of Transportation (DOTs), to focusing on end customers and segments where we can offer superior services. By providing broader services and excellent delivery, we gain a competitive edge, leading to long-term partnerships with these end customers. When we secure large projects, such as data centers or manufacturing plants, our superior performance makes us the first choice for future projects. While we cannot charge significantly more, we can command a slight premium for our capabilities and reliability.
In our E-infrastructure projects, we are an insurance policy for our clients. Meeting deadlines is critical, especially when our site development work is part of a larger multi-billion dollar project. A two-week delay on our end could result in a six-month delay for the entire project. Our ability to deliver on time ensures that clients continue to choose us for subsequent projects.
With a clear backlog of projects, what is driving your acquisition strategy to better meet that demand?
There are two main aspects to our acquisition strategy. First, we look at the geography of the U.S. and identify large data center and manufacturing growth markets where we currently do not have a presence. We have been successful in redirecting some of our transportation business and assets to support other markets. For example, a large data center customer asked us to do a project in Idaho. Instead of moving our team and equipment from Georgia, we leveraged our assets and capabilities in Utah to complete the project, leading to more projects from that customer. Secondly, we are focused on geographic expansion through acquisitions in site development and markets we do not currently serve.
Equally important is expanding the range of services we offer. In data centers, for example, we develop the property from a raw piece of land to final slope and grade. We also dig duct banks and install other underground infrastructure. By acquiring additional service areas, such as electrical or piping, we can provide a comprehensive suite of services, making it easier for customers to deal with one company rather than multiple subcontractors.
What are the key drivers of change in the segments you are contributing to?
Supply chain reliability has become paramount, especially after the disruptions caused by the pandemic. Companies realize that the cost of building plants in the U.S. and producing goods domestically is outweighed by the security and continuity of their operations. Holding inventory to cover long supply chains from overseas is no longer as attractive. Manufacturing technology has advanced significantly, reducing the need for large workforces and making the economics of bringing production back to the U.S. more viable. Additionally, sustainability concerns and legislation are driving efforts to localize supply chains, making transportation routes shorter and more efficient.
Given an increasing amount of manufacturing is coming back to the U.S., where are you seeing new hotspots of activity?
The Southeast is a major growth area due to business-friendly state governments and non-union labor, making it easier to manage. We’re also seeing growth through the Rocky Mountains, which traditionally were not known for manufacturing. These areas offer relatively low costs for land and construction. The availability of power and water is becoming a significant driver for these decisions. Southern states and Rocky Mountain areas have better access to these resources, which is critical for new data center sites.
States like Colorado, Montana, Idaho, Tennessee, Ohio, and Georgia are becoming hot spots. The importance of power and water in site selection is often overlooked but is a crucial factor for future growth in these regions.
Where do you see Sterling Infrastructure and the U.S. economy by 2028?
By 2028, we expect Sterling to be significantly larger, with more than double our current profitability. The natural tailwinds in our markets and continued acquisition growth will drive this trajectory. The demand for data centers will continue to grow, fueled by AI and increased data requirements. We also anticipate having a fourth segment. For example, one of the areas we have explored is the power grid, which is a multi-trillion-dollar market needing significant upgrades. The U.S. grid and power supply are far behind current demands, and this gap will only widen with the increasing load from electric vehicles, data centers, and manufacturing plants. This ongoing demand will significantly impact both the infrastructure build-out and the broader economy.
