Granite Construction Finds Momentum in Q1 Despite Rising Costs

Granite Construction (GVA) reported a mixed but encouraging first-quarter 2025 performance, with adjusted earnings turning positive for the first time in over a year amid rising revenue and a robust pipeline of future projects. While the company’s net loss widened slightly to $34 million, its adjusted diluted EPS improved to $0.01 from a loss of $(0.21) in Q1 2024, signaling progress in its turnaround efforts. The results underscore Granite’s dual focus on infrastructure growth and operational discipline, even as it grapples with rising expenses and macroeconomic uncertainties.

Revenue Grows, but Margins and Costs Tell a Complex Story

Total revenue rose 4% to $700 million, driven by both its Construction and Materials segments. The Construction segment, which accounts for over 80% of sales, saw revenue increase 3.3% to $614.6 million, with gross profit soaring 50% to $85.4 million. This improvement stemmed from favorable weather, new project starts, and a better mix of higher-margin work. Gross profit margins in Construction expanded to 13.9% from 9.5% a year earlier—a critical win for a company that has long struggled with volatile margins in its core business.

The Materials segment, which includes aggregates and asphalt, posted a 10.2% revenue jump to $84.9 million, fueled by contributions from the recently acquired Dickerson & Bowen business. While the segment still reported a gross loss of $1.6 million (narrowing from $2.5 million in Q1 2024), cash gross profit—a non-GAAP metric excluding depreciation—soared 33% to $10.5 million. This reflects Granite’s strategy to vertically integrate materials into its construction projects, a move management argues will boost long-term profitability.

However, rising selling, general, and administrative (SG&A) expenses clouded the picture. SG&A surged 16.6% to $116 million, largely due to a $18 million increase in stock-based compensation. This pushed SG&A to 16.6% of revenue, above the company’s 9% target for the year. Management has acknowledged this as a near-term headwind, with stock-based compensation projected to total $45 million in 2025.

The CAP Pipeline: A Silver Lining for Future Growth

A standout in the report was the Committed and Awarded Projects (CAP) backlog, which rose 8% sequentially to $5.7 billion. This represents a $241 million year-over-year increase and includes high-profile wins like a $78 million road project in Anaheim, California, and a $97 million military infrastructure contract in Guam. CEO Kyle Larkin called the CAP growth a “record” and a “key indicator of future revenue,” emphasizing Granite’s ability to secure projects in both public and private markets.

With 2025 revenue guidance unchanged at $4.2–$4.4 billion and adjusted EBITDA margins expected between 11%–12%, the CAP backlog suggests Granite is on track to meet its targets. The company also reiterated its 2027 goals, which include achieving $6.5–$7.0 billion in revenue and a 12%–14% adjusted EBITDA margin.

Risks and Challenges Ahead

Despite the positives, Granite faces hurdles. Its net cash position declined to $379 million as of Q1, down from $578 million at year-end, due to marketable securities purchases. Meanwhile, macroeconomic risks—such as inflation, supply chain disruptions, and project delays—could pressure margins and timelines.

The stock-based compensation spike also raises questions about how much of the SG&A increase is structural versus temporary. If non-cash expenses continue to balloon, they could limit Granite’s ability to deliver consistent earnings growth.

Conclusion: A Hold with Upside Potential

Granite Construction’s Q1 results paint a company making incremental progress but still navigating choppy waters. The CAP pipeline and margin improvements in Construction are encouraging, while the Materials segment’s cash profitability shows promise for vertical integration. However, the stock-based compensation burden and macro risks warrant caution.

Investors should watch for two key indicators: First, whether SG&A can be reined in closer to the 9% of revenue target. Second, whether the CAP backlog translates into sustained revenue growth in the second half of 2025. If Granite can stabilize its costs and execute on its project pipeline, its stock—currently trading at roughly 7x its 2025 adjusted EPS consensus—could offer value in an infrastructure sector that remains a long-term growth theme.

For now, Granite’s story remains a work in progress, but the foundation for a turnaround is visible. The question is whether management can turn that foundation into a sustainable profit machine.