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Dycom's (DY) Telecom Business Rally Offset by Economic Woes?
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Dycom Industries, Inc. (DY - Free Report) has been benefiting from higher demand for a single high-capacity fiber network, an extended geographic reach and proficient program management and network planning services. Also, regular contract wins and solid liquidity help it gain further.
In the past month, the stock gained 10.9% compared with the Zacks Building Products - Heavy Construction industry’s 5.5% fall. The company’s fiscal fourth-quarter 2023 results reflect solid earnings and revenue performance. The top line increased 20.5% on a year-over-year basis and surpassed the Zacks Consensus Estimate by 12.3%. Dycom’s adjusted earnings of 83 cents per share topped the consensus mark by 388.2% and increased from the year-ago adjusted figure of 2 cents.
However, this Florida-based specialty contracting service provider has been witnessing higher fuel costs, labor woes and supply constraints. Also, seasonal impacts on first-quarter fiscal 2024 are concerning. For the fiscal first quarter, it expects adjusted EBITDA margin to be in line with or increase modestly from year-ago levels.
The Zacks Consensus Estimate for fiscal first quarter earnings moved down 29.6% in the past seven days to 19 cents. The same for first-quarter fiscal 2024 declined 15.2% to 95 cents in a week. Nonetheless, the company currently has a VGM Score of A, which signifies bullish growth prospects.
Strong Telecom Business: As telecommunications networks face increased demand, customers need to expand the capacity, improve the performance of existing networks and deploy new networks. The Infrastructure Investment and Jobs Act includes more than $40 billion for the construction of rural communications networks in unserved and underserved areas across the country.
In the past few quarters, the company’s top line benefited immensely from the extensive deployment of 1-gigabit wireline networks by major customers. In fact, six of its top 10 customers have announced substantial new plans for deployments of fiber-to-the-home. Dycom remains optimistic about the strengthening industry environment, given strong end-market drivers.
Robust Contract Flows: Dycom has secured new contracts from Lumen, AT&T, Charter, Windstream and various rural fiber construction companies, which will boost the company’s growth momentum.
Dycom’s backlog at the end of fiscal 2023 totaled $6.141 billion compared with $6.116 billion at the end of the third quarter of fiscal 2023. Of the backlog, $3.459 billion is projected 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 growth drivers. The company remains positive about substantial opportunities across a broad array, despite prevailing market uncertainties.
Engineering & Construction Work Looks Good: Dycom expects engineering and construction work to gain strong momentum in the coming quarters, given solid market prospects. Several large programs have gained momentum in recent times and many new contracts have commenced meaningful activity, thus propelling Dycom’s growth.
Liquidity to Boost Investors’ Sentiments: Dycom had strong liquidity of $757.8 million at the fiscal 2023 end, including cash and cash equivalents worth $224.2 million compared with $310.8 million on Jan 29, 2022. The company has enough liquidity to meet its short-term obligation of $17.5 million. Also, it does not have significant debt maturities until April 2026.
Hurdles to Cross
Macro-Economic Headwinds: Dycom’s business has been impacted by persistent macroeconomic issues like supply chain disruption, energy market volatility and labor woes. Broad increases in demand for fiber optic cable and related equipment may cause delivery volatility in the short to intermediate term. Also, the automotive and equipment supply chain remains challenging, particularly for the large truck chassis required for specialty equipment. The prices of capital equipment are increasing.
During the fiscal 2023, equipment maintenance and fuel costs increased 0.3% as a percentage of contract revenues, primarily due to an increase in fuel prices. The company expects these factors to likely impact demand in the future.
Seasonality & Cyclicality: Dycom’s first and fourth quarters of every fiscal year are prone to seasonality. Each year, its first and fourth quarter results are impacted by inclement weather, fewer available workdays, reduced daylight work hours and the restart of calendar payroll taxes. Considering these headwinds, the company has projected contract revenue growth in the mid- to high single digits and a modest improvement in adjusted EBITDA margin.
Dycom’s services are highly cyclical and remain vulnerable to economic downturns. During times of economic downturn, volatility in the credit and equity markets reduces the availability of debt or equity financing, which 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 a considerable business presence in Canada.
Energy Market Woes: Fluctuations in the price of oil can pose significant headwinds for the company, as the cost of conducting business is linked with an increase in fuel price. As the majority of contracts do not allow the company to adjust pricing for higher fuel costs during a contract term, Dycom’s inability to accommodate price increases adds to its woes and directly hurts margins.
Concentrated Sales: A significant portion of Dycom’s sales come from its top five customers. During the fiscal 2023, Dycom’s largest customer, AT&T, contributed 25.2% to total revenues. Lumen (the second-largest customer) added 12.7% to total revenues and Comcast made up 11.3% of the same. Verizon and Frontier represented 9.1% and 8.5% of revenues, respectively. On a combined basis, the company’s top-five customers generated approximately 66.7%, 66.2% and 74.1% of revenues during fiscal 2023, fiscal 2022 and fiscal 2021, respectively.
Key Picks
Some better-ranked stocks in the Zacks Construction sector are:
United Rentals, Inc. (URI - Free Report) currently carries a Zacks Rank #2 (Hold). The long-term earnings growth rate of the company is 16.3%.
The Zacks Consensus Estimate for URI’s 2023 sales and earnings per share (EPS) indicates growth of 20.3% and 28.3%, respectively, from the previous year’s reported levels.
Sterling Infrastructure, Inc. (STRL - Free Report) currently carries a Zacks Rank #2. STRL has a trailing four-quarter earnings surprise of 19.3%, on average.
The Zacks Consensus Estimate for STRL’s 2023 sales indicates a 0.8% decline, while that for EPS suggests 10.8% growth.
Skyline Champion Corporation (SKY - Free Report) currently carries a Zacks Rank #2. SKY has a trailing four-quarter earnings surprise of 43.2%, on average.
Earnings estimates for SKY’s fiscal 2024 have increased to $4.19 per share from $4.04 over the past 60 days.
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Dycom's (DY) Telecom Business Rally Offset by Economic Woes?
Dycom Industries, Inc. (DY - Free Report) has been benefiting from higher demand for a single high-capacity fiber network, an extended geographic reach and proficient program management and network planning services. Also, regular contract wins and solid liquidity help it gain further.
In the past month, the stock gained 10.9% compared with the Zacks Building Products - Heavy Construction industry’s 5.5% fall. The company’s fiscal fourth-quarter 2023 results reflect solid earnings and revenue performance. The top line increased 20.5% on a year-over-year basis and surpassed the Zacks Consensus Estimate by 12.3%. Dycom’s adjusted earnings of 83 cents per share topped the consensus mark by 388.2% and increased from the year-ago adjusted figure of 2 cents.
However, this Florida-based specialty contracting service provider has been witnessing higher fuel costs, labor woes and supply constraints. Also, seasonal impacts on first-quarter fiscal 2024 are concerning. For the fiscal first quarter, it expects adjusted EBITDA margin to be in line with or increase modestly from year-ago levels.
The Zacks Consensus Estimate for fiscal first quarter earnings moved down 29.6% in the past seven days to 19 cents. The same for first-quarter fiscal 2024 declined 15.2% to 95 cents in a week. Nonetheless, the company currently has a VGM Score of A, which signifies bullish growth prospects.
Image Source: Zacks Investment Research
Let’s discuss the factors that are supporting this Zacks Rank #3 (Hold) company’s growth trajectory. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Growth Drivers
Strong Telecom Business: As telecommunications networks face increased demand, customers need to expand the capacity, improve the performance of existing networks and deploy new networks. The Infrastructure Investment and Jobs Act includes more than $40 billion for the construction of rural communications networks in unserved and underserved areas across the country.
In the past few quarters, the company’s top line benefited immensely from the extensive deployment of 1-gigabit wireline networks by major customers. In fact, six of its top 10 customers have announced substantial new plans for deployments of fiber-to-the-home. Dycom remains optimistic about the strengthening industry environment, given strong end-market drivers.
Robust Contract Flows: Dycom has secured new contracts from Lumen, AT&T, Charter, Windstream and various rural fiber construction companies, which will boost the company’s growth momentum.
Dycom’s backlog at the end of fiscal 2023 totaled $6.141 billion compared with $6.116 billion at the end of the third quarter of fiscal 2023. Of the backlog, $3.459 billion is projected 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 growth drivers. The company remains positive about substantial opportunities across a broad array, despite prevailing market uncertainties.
Engineering & Construction Work Looks Good: Dycom expects engineering and construction work to gain strong momentum in the coming quarters, given solid market prospects. Several large programs have gained momentum in recent times and many new contracts have commenced meaningful activity, thus propelling Dycom’s growth.
Liquidity to Boost Investors’ Sentiments: Dycom had strong liquidity of $757.8 million at the fiscal 2023 end, including cash and cash equivalents worth $224.2 million compared with $310.8 million on Jan 29, 2022. The company has enough liquidity to meet its short-term obligation of $17.5 million. Also, it does not have significant debt maturities until April 2026.
Hurdles to Cross
Macro-Economic Headwinds: Dycom’s business has been impacted by persistent macroeconomic issues like supply chain disruption, energy market volatility and labor woes. Broad increases in demand for fiber optic cable and related equipment may cause delivery volatility in the short to intermediate term. Also, the automotive and equipment supply chain remains challenging, particularly for the large truck chassis required for specialty equipment. The prices of capital equipment are increasing.
During the fiscal 2023, equipment maintenance and fuel costs increased 0.3% as a percentage of contract revenues, primarily due to an increase in fuel prices. The company expects these factors to likely impact demand in the future.
Seasonality & Cyclicality: Dycom’s first and fourth quarters of every fiscal year are prone to seasonality. Each year, its first and fourth quarter results are impacted by inclement weather, fewer available workdays, reduced daylight work hours and the restart of calendar payroll taxes. Considering these headwinds, the company has projected contract revenue growth in the mid- to high single digits and a modest improvement in adjusted EBITDA margin.
Dycom’s services are highly cyclical and remain vulnerable to economic downturns. During times of economic downturn, volatility in the credit and equity markets reduces the availability of debt or equity financing, which 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 a considerable business presence in Canada.
Energy Market Woes: Fluctuations in the price of oil can pose significant headwinds for the company, as the cost of conducting business is linked with an increase in fuel price. As the majority of contracts do not allow the company to adjust pricing for higher fuel costs during a contract term, Dycom’s inability to accommodate price increases adds to its woes and directly hurts margins.
Concentrated Sales: A significant portion of Dycom’s sales come from its top five customers. During the fiscal 2023, Dycom’s largest customer, AT&T, contributed 25.2% to total revenues. Lumen (the second-largest customer) added 12.7% to total revenues and Comcast made up 11.3% of the same. Verizon and Frontier represented 9.1% and 8.5% of revenues, respectively. On a combined basis, the company’s top-five customers generated approximately 66.7%, 66.2% and 74.1% of revenues during fiscal 2023, fiscal 2022 and fiscal 2021, respectively.
Key Picks
Some better-ranked stocks in the Zacks Construction sector are:
United Rentals, Inc. (URI - Free Report) currently carries a Zacks Rank #2 (Hold). The long-term earnings growth rate of the company is 16.3%.
The Zacks Consensus Estimate for URI’s 2023 sales and earnings per share (EPS) indicates growth of 20.3% and 28.3%, respectively, from the previous year’s reported levels.
Sterling Infrastructure, Inc. (STRL - Free Report) currently carries a Zacks Rank #2. STRL has a trailing four-quarter earnings surprise of 19.3%, on average.
The Zacks Consensus Estimate for STRL’s 2023 sales indicates a 0.8% decline, while that for EPS suggests 10.8% growth.
Skyline Champion Corporation (SKY - Free Report) currently carries a Zacks Rank #2. SKY has a trailing four-quarter earnings surprise of 43.2%, on average.
Earnings estimates for SKY’s fiscal 2024 have increased to $4.19 per share from $4.04 over the past 60 days.