Sterling’s Transportation backlog looks solid into 2026, but time‑limited federal funding and execution risks keep valuation exposed

What happened

Sterling enters 2026 with its Transportation unit showing a healthy backlog and steady bidding activity, which complements an E‑Infrastructure shift that has lifted backlog margins to ~17.8% and delivered a 1.4x book‑to‑burn. That diversification strengthens near‑term revenue visibility, supports robust cash generation and ongoing buybacks, and sits atop a net‑cash balance sheet. Yet the new article’s note that federal funding is in its “final stretch” highlights timing risk: award cadence and starts could slow if appropriations or program momentum fade in 2026. Execution and cost pressures we flagged remain materially relevant — long‑lead electrical equipment, power interconnect bottlenecks, tariff‑driven inflation, and Davis‑Bacon/labor tightness can still delay revenue recognition or compress margins. Given Sterling already trades at a premium (~36.8x TTM P/E; ~24x 2024 FCF), Transportation tailwinds improve diversification but do not materially de‑risk the investment case absent sustained improvements in backlog conversion and margin quality.

Implication

Maintain HOLD. The Transportation unit’s healthy backlog and steady bids provide useful near‑term diversification from E‑Infrastructure, improving revenue visibility and cash flow resilience. However, the description of federal funding as entering a “final stretch” creates a timing risk: award cadence and project starts could decelerate in 2026, exposing Sterling to the same execution and input‑cost risks we already monitor. Investors should watch Transportation lettings/start cadence, Unsigned Awards, book‑to‑burn, margin in backlog, and power/equipment lead‑time notices over the next two quarters. Only sustained book‑to‑burn ≥1.2x with backlog margins >~18% and unchanged cash conversion would justify a move to BUY; deterioration below ~16% margin or book‑to‑burn <1.0x would argue for a downgrade.

Thesis delta

Small, conditional shift: the Zacks piece corroborates that Transportation adds near‑term diversification and backlog support, but its characterization of funding as time‑limited reinforces our caution on timing risk. We therefore keep the HOLD — Transportation strength reduces short‑term execution concentration risk but does not materially de‑risk the valuation or remove the need for sustained, demonstrable backlog conversion.