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Dycom's (DY) Focus on Acquisition Strong, Competition Stiff

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Dycom Industries, Inc (DY - Free Report) is likely to gain from surging demand for 1-gigabit deployment and wireline networks, strong backlog and consistent contract flows in the long run. However, intense competition in the industry and seasonality are major concerns.

Factors Driving Growth

Higher demand for network bandwidth and mobile broadband is one of the major factors, which is driving Dycom’s business. With the evolution of smart phones, customers require high-speed network that creates demand and enables the company to boost the top line. In the past few quarters, the company has benefited immensely from extensive deployment of 1-gigabit wireline networks by major customers. Thus, we expect strong growth prospects to continue in the telecommunication business going forward.

Moreover, with the commencement of new contracts, the company expects engineering and construction work to gain strong momentum in the upcoming quarters. Dycom has secured new customer business from AT&T, Comcast, CenturyLink and Windstream Holdings, which will boost the company’s growth momentum.

Further, Dycom continues to experience strong 12-month backlog, which indicates resumed growth through the next calendar year. The company’s backlog came in at $7.881 billion as of Jul 28, 2018 versus $5.877 billion on Apr 28, 2018. Of the total, approximately $2.908 billion is expected to be completed in the next 12 months. Going forward, we expect the company’s string of contract wins and strong customer relationships to act as key drivers.

In order to expand market share, the company seeks to grab opportunities by undertaking acquisitions. Its strong financial position along with diligent operational execution, allows it to undertake strategic initiatives. During March 2018, the company acquired certain assets and assumed certain liabilities of a telecommunications construction and maintenance services provider in the Midwest and Northeast United States.

Concerns

Massive promotional expenditure and intense competition in U.S. telecommunications industry is likely to mar the company’s prospects. Presently, Dycom is facing cut-throat pricing competition from peers like EMCOR Group (EME - Free Report) , MasTec, Inc (MTZ - Free Report) and North American Construction Group (NOA - Free Report) .

Seasonal fluctuations and cyclicality of business further add to its  woes. Dycom’s business can be significantly impacted by inclement weather conditions as a major portion of its operations are based outdoors. Moreover, during times of economic downturn, volatility in credit and equity markets reduce the availability of debt or equity financing. This, in turn, reduces capital spending on the part of clients. Other macroeconomic factors like currency exchange rates can impact the business as the company has considerable presence in Canada.

Moreover, lowered guidance for fiscal 2019 heightens investors’ concerns over the stock’s potential. Considering weaker-than-expected business so far in 2018, the company lowered adjusted earnings guidance in the range of $2.62-$3.07 per share for fiscal 2019, compared with the prior expectation of $4.26-$5.15 in August 2018. The company expects contract revenues in the range of $3.01-$3.11 billion compared with $3.23-$3.43 billion expected earlier. Adjusted EBITDA, as a percentage of contract revenues, is expected in the range of 10.7-11.1% (versus 12.4-12.9% projected earlier).

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