Granite Construction: Margin Momentum and CAP Catalysts Fueling a Strong 2025 Outlook

Granite Construction Incorporated (NYSE: GRN) has long been a bellwether for U.S. infrastructure demand, and its Q1 2025 results underscore a strategic transformation that could position it to outperform its own 2025 guidance. While headline net losses persisted, the underlying story of margin expansion, robust backlog growth, and operational discipline suggests the company is on the cusp of a cyclical upswing. Let's dissect the metrics and strategic moves that could catalyze this shift.

Margin Improvements: A Structural Turnaround?

Granite's Q1 earnings highlight a critical shift in profitability. The Construction segment's gross margin surged to 13.9% from 9.5% a year ago, driven by improved project execution and the ramp-up of high-margin contracts. This 440-basis-point expansion isn't merely cyclical—it reflects management's focus on selective bidding and portfolio optimization. For instance, the $5.7 billion Committed and Awarded Projects (CAP) backlog, up 8% sequentially and 8% year-over-year, provides a runway for sustained margin growth.

The Materials segment, though still in the red, narrowed its gross loss to $1.6 million from $2.5 million in Q1 2024. The acquisition of Dickerson & Bowen has been pivotal, boosting aggregate sales volumes and prices. Cash gross profit in Materials jumped 33% to $10.5 million, a clear sign that vertical integration is paying off. Management's emphasis on aggregates pricing—targeting high single-digit growth in 2025—is a key lever to lift margins further.

CAP Growth: The Leading Indicator for Revenue Surges

The CAP metric is Granite's most compelling forward-looking indicator. At $5.7 billion, it's not just a record figure—it's a testament to strong bidding activity in both public (transportation, water/sewer) and private (commercial, industrial) markets. This backlog is now 13% above pre-pandemic levels, suggesting Granite's strategy of geographic diversification and client diversification is working.

Critically, CAP's sequential growth (up $444 million from Q4 2024) indicates that Granite is winning projects in regions with favorable pricing and regulatory environments. In states like California, Texas, and Washington, where infrastructure spending is prioritized, the company's expertise in large-scale public projects is a competitive advantage.

Risks and Red Herrings

Bearish investors might point to the $34 million net loss, up from $31 million in Q1 2024. However, this loss is largely attributable to non-cash items like a $28 million jump in SG&A expenses, primarily due to stock-based compensation. Excluding these, operating cash flow held steady at $4 million, in line with the 9% of revenue target.

The real risks lie in macroeconomic headwinds: rising commodity prices (natural gas, diesel), tariffs, and weather delays. Granite's ability to pass on cost increases via contract terms—evident in aggregate price hikes—will be critical. A prolonged downturn in private-sector construction or federal funding delays could also test the CAP pipeline.

Investment Thesis: Positioning for a Margin Inflection Point

Granite's Q1 results suggest it is executing a two-pronged strategy:
1. Margin Expansion: Construction margins have room to grow further as high-margin CAP projects come online. Materials' losses could turn to profits if aggregates pricing holds.
2. Backlog Conversion: The $5.7 billion CAP backlog, if executed efficiently, could push revenue toward the upper end of the $4.4 billion guidance, potentially even exceeding it.

At current levels, Granite trades at a forward EV/EBITDA of ~6x, a discount to peers like Quanta Services (PWR) or Tutor Perini (TRN). This reflects skepticism around its net losses and SG&A volatility. However, if margins stabilize and the CAP backlog converts as expected, the stock could re-rate.

Recommendation

Investors should consider a long position in Granite, particularly if they believe U.S. infrastructure spending will remain robust. The CAP backlog provides a clear path to revenue growth, while margin improvements suggest earnings could surprise to the upside. Monitor SG&A trends closely—management's ability to control discretionary costs will be key.

In the near term, Granite's stock could remain range-bound as investors await Q2 updates on backlog conversion and cost trends. However, with the CAP pipeline at record levels and pricing power in aggregates, Granite is well-positioned to deliver a profitable 2025—and perhaps even exceed its own ambitious targets.

Disclosure: The author holds no positions in Granite Construction as of publication.