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Dycom Banks on Telecom Business, Inclement Weather Hurts

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Dycom Industries, Inc.’s (DY - Free Report) strength in Telecommunication business, strong backlog and consistent contract flows bode well for its future earnings prospects. However, inclement weather, along with customer timing and tactical considerations raise concerns.

Meanwhile, Dycom's shares have lost 38.7% compared with the industry’s decline of 13.8% in the past year.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Factors Driving Growth

Dycom’s business is benefiting from higher demand for network bandwidth and mobile broadband. In the past few quarters, the company immensely benefited from extensive deployment of 1-gigabit wireline networks by major customers. Meanwhile, it has secured several converged wirelines and wireless multi-use network deployments across the country. Notably, during the third quarter of fiscal 2019, the telecommunication business added 91.1% to its total revenues.

Additionally, Dycom is experiencing robust backlog growth over the last few quarters, which helped the company boost top-line growth. As of Oct 27, 2018, its 12-month backlog of $7.313 billion was up from $5.847 billion recorded on Jan 27, 2018. The company expects to complete more than 35% of the given backlog over the next 12 months. Going forward, we expect Dycom’s string of contract wins and strong customer relationships to act as growth drivers.

In a bid to expand its market share, the company has undertaken several strategic initiatives, given strong financial position along with diligent operational execution. In March 2018, it acquired certain assets and assumed certain liabilities of a telecommunications construction and maintenance services provider in the Midwest and Northeast United States, thereby expanding existing markets and portfolio.

Causes of Concerns

Dycom’s business can be significantly impacted by inclement weather conditions, as a major portion of its operations is outdoor-based. Dycom’s fourth-quarter fiscal 2019 results are likely to be negatively impacted by inclement weather, fewer available work days due to holidays, reduced daylight work hours and the restart of calendar payroll taxes. Given these downturns, the company has lowered its fiscal fourth-quarter view. The company expects total contract revenues within $695-$745 million, lower than the prior-year level of $780.2 million. Also, earnings are anticipated within 2-24 cents per share for the quarter, lower than $1.47 per share reported in the year-ago period.

Additionally, during the first nine months of fiscal 2019, its adjusted earnings of $2.68 per share fell 28.7% on a year-over-year basis. In fact, overall fiscal third-quarter results of Dycom were impacted by large-scale deployments, which were slower than expected due to customer timing and tactical considerations. Gross margins declined 156 basis points in the quarter, reflecting under-absorption of labor and field costs of large customer programs.
Given weaker-than-expected business so far this year, the company has slightly lowered the mid-point of its prior guided range for fiscal 2019. The company currently expects earnings in the range of $2.70-$2.92 per share versus $2.62-$3.07 expected earlier.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector include Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes Dredge & Dock and Comfort Systems sport a Zacks Rank #1 (Strong Buy), EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock’s earnings for 2018 are expected to increase 111.1%.

Comfort Systems surpassed the Zacks Consensus Estimates in three of the trailing four quarters, with the average being 16.5%.

EMCOR’s 2018 earnings are expected to grow 20%.

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