Sterling Infrastructure's Data Center Play: Can 29% EPS Growth Hold?

Sterling Infrastructure (STRL) has emerged as a standout player in the infrastructure sector, reporting a 29.4% surge in Q1 2025 EPS and raising its full-year guidance to a range implying 18.5–25.5% growth. The question on investors' minds is: Can this blistering pace continue? The answer hinges on three pillars—its strategic shift toward high-margin data center projects, robust backlog visibility, and favorable regulatory tailwinds—while navigating execution risks. Let's dissect the opportunities and pitfalls.

The Data Center Pivot: Margins and Momentum

Sterling's shift to E-Infrastructure—focused on data centers, semiconductors, and advanced manufacturing—has been transformative. In Q1 2025, this segment contributed 51% of revenue and 65% of its $2.13 billion backlog, up from $1.2 billion a year earlier. Margins in this segment expanded to 23% (vs. 17% in Q1 2024), driven by high-margin projects tied to AI, digital transformation, and government initiatives like the CHIPS Act and Infrastructure Investment and Jobs Act.

This strategic focus isn't just about revenue—it's about profitability. Data center projects typically command longer contracts and recurring maintenance work, providing steady cash flows. Sterling's Q1 2025 operating margins expanded by 618 basis points, underscoring how this shift is boosting profitability.

Backlog and Acquisitions: Fueling Growth

Sterling's $2.13 billion backlog (up 27% YoY in the E-Infrastructure segment) offers a clear roadmap. Analysts project sequential quarterly EPS growth of 35.3% (Q2), 32.5% (Q3), and 43.8% (Q4) in 2025, suggesting momentum will carry into year-end. The recent $505 million acquisition of CEC Facilities Group adds critical capacity. CEC's electrical contracting expertise, particularly in Texas and the Rocky Mountains, complements Sterling's civil engineering strengths, enabling end-to-end solutions for hyperscalers and semiconductor firms.

The deal is immediately accretive, boosting 2025 EPS by $0.63–$0.70. CEC's 13% margin and $51–$54 million in 2024 revenue also align with Sterling's high-margin targets.

Regulatory Winds at Its Back—And in Its Face

Government spending on digital infrastructure is a tailwind. The CHIPS Act's $52 billion for semiconductor manufacturing and the Infrastructure Investment and Jobs Act's $1.2 trillion for physical infrastructure have created a pipeline of projects. Sterling's focus on mission-critical facilities (e.g., data centers for cloud providers) positions it to win contracts in these programs.

However, risks loom. Rising construction costs, tariffs, and supply chain bottlenecks could pressure margins. Sterling's backlog relies heavily on hyperscaler spending, which could slow if AI adoption plateaus or corporate IT budgets tighten. Additionally, the CEC acquisition's success hinges on retaining CEC's leadership and navigating regulatory approvals.

Valuation: Premium, but Justified?

Sterling trades at a forward P/E of 25.32x, above the industry average of 20.43x. But this premium is underpinned by its growth trajectory: 41.2% 2025 EPS growth estimates and a backlog with 10+ years of visibility in the E-Infrastructure segment. Competitors like EMCOR (EME) and Quanta (PWR) are growing at 9–15%, but neither boasts Sterling's vertical integration or margin profile post-CEC.

The Verdict: Buy the Momentum, Mind the Risks

Sterling's execution to date is compelling. Its E-Infrastructure segment's margin expansion, accretive acquisitions, and backlog depth suggest the 29% EPS growth isn't a fluke. Even if 2026 estimates ease to 10% growth, 2025's trajectory remains intact.

Investors should buy STRL if they believe AI-driven data center demand and U.S. infrastructure spending will sustain. However, the stock's sensitivity to macroeconomic headwinds and supply chain pressures requires caution. The Zacks Rank #2 (Buy) and upward-trending analyst estimates reinforce its near-term appeal.

Bottom Line: Sterling's data center pivot is paying off, but investors must remain vigilant on execution and external risks. For now, the EPS growth story holds—just don't forget to keep an eye on the clouds (literally and figuratively).