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Dycom (DY) Struck By Surging Costs & Macroeconomic Woes

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Last week, specialty contracting services provider, Dycom Industries Inc. (DY - Free Report) reported another earnings beat in its fourth-quarter fiscal 2017. However, the bottom line came in 10.4% lower than the year-ago figure, dragged by weak contract revenues.

We anticipate that a rise in operating expenses, poor contribution from acquired businesses, pronounced seasonal fluctuations and the impact of acquired businesses to thwart growth in the upcoming quarters as well. Mirroring these headwinds, the company has trimmed its first-quarter fiscal 2018 guidance.

In light of these headwinds, the stock gave a poor show. Over three months, Dycom has lost 6.5% in stark contrast to the industry’s average gain of 1.6%. Also, the Zacks Consensus Estimate for 2017 earnings has moved south over a couple of months from $5.29 to $5.05.

Read on to find the major factors restricting the company’s growth and why it may be prudent to avoid this Zacks Rank #4 (Sell) stock at the moment.

Factors at Play

Dycom’s expects that its gross margins will be pressured in the upcoming quarter due to expected adverse mix of work activity, lower revenues and high costs associated with initiation of customer programs. The general and administrative expenses, as a percentage of revenues, are also expected to increase year over year, putting pressure on operating margins.

The company’s business remains highly vulnerable to risks associated with the U.S. telecommunications industry. Presently, the space is facing intense pricing competition. Severe spectrum crunch, coupled with gradual smartphone and tablet adoption, is compelling wireless operators to seek other options for raising revenues.

The telecommunications industry is highly dynamic in nature. It continues to experience rapid technological, structural and competitive changes and may reduce service requirements from Dycom, thereby affecting its financial performance.

Moreover, the company’s services are highly cyclical and remain vulnerable to economic downturns. Other macroeconomic factors like currency exchange rate also addto the company’s challengesas it has considerable business presence in Canada.

Stocks to Consider

Some better-ranked stocks in the industry are Sterling Construction Company Inc. (STRL - Free Report) , MasTec, Inc. (MTZ - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Sterling Construction and MasTec sport a Zacks Rank #1 (Strong Buy), EMCOR Group carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Sterling Construction has an average positive earnings surprise of 47.0% for the trailing four quarters, having surpassed estimates twice.

MasTec managed to beat estimates every time in the trailing four quarters, at an average earnings surprise of 29.7%.

EMCOR Group has an average positive earnings surprise of 11.7% for the trailing four quarters, having surpassed estimates thrice.

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