It doesn't take a rocket scientist to understand that there will be a tremendous amount of infrastructure work in the wake of Hurricane Katrina. Do a quick search on companies with experience building bridges and highways, and you'll find big winners like Sterling Construction (AMEX:STV).
Sterling has been a five-bagger over the last year, and most of that move has been since July. The stock is up 13.2% at midday and is at a new 52-week high. 90% of the company's revenue is construction-related.
Revenues in the latest quarter were up 82% compared to the year-ago quarter, while net income lagged with a 48% gain. Backlog has been soaring, extending into 2007.
For the current year, the company expects pre-tax earnings of $8 million, or roughly $1.04 a share. Since the company has substantial tax loss carry-forwards, the company will be sheltered from significant income taxes for now but still trades for a rich 24.9 times forward earnings (and this with no analysts following the company).
There are many risks in small stocks like this. Margins ebb and flow due to the intensely competitive nature of the business. For now, with the massive reconstruction bids that will be let, the company might be able to improve margins as it seeks and obtains new work. (That depends, again, upon how competitive bidding itself becomes.) But the company is currently making a significant investment in crews and equipment to cover its pre-Katrina boom in business. Given current concerns over staffing, I'm a little concerned about how quickly the company can win new bids and put the staffing in place to produce high-quality work.
While earnings can certainly soar, eventually the tax man will take his slice and make quarter-over-quarter comparisons more difficult. Because of this, investors chasing this stock today will probably see little long-term lift, as investors consider tax angles and the actual profitability of any signed contracts.
Better long-term opportunities can be found in do-it-yourself retailers like Lowe's (NYSE:LOW) and Motley Fool Inside Value recommendation Home Depot (NYSE:HD). All are trading near their 52-week highs but offer more predictable growth, without the bidding and weather risk that is inherent in any construction company.
Fool contributor W.D. Crotty owns shares in Home Depot and Southern Company. Click here to see The Motley Fool's disclosure policy.
