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Will Dycom's Soild Telecom Business Combat Weather Woes?

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Dycom Industries, Inc. (DY - Free Report) has been riding high on strengthening telecommunication business, strong backlog and consistent contract flows. The company’s strong financial position and diligent operational execution also helped it to deliver stellar performances in the last few quarters.

Recently, the company posted better-than-expected third-quarter fiscal 2020 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate by 22.2% and 4.5%, respectively.

Dycom — which shares space with EMCOR Group, Inc. (EME - Free Report) , Great Lakes Dredge & Dock Corporation (GLDD - Free Report) and North American Construction Group Ltd. (NOA - Free Report) in the Zacks Building Products - Heavy Construction industry — has rallied 17% in the past three months. This compares favorably with the industry’s growth of 8%.

However, higher-than-expected costs related to large customer programs, inclement weather, intense pricing competition and timing uncertainty pose concerns.

Let’s delve deeper and find out the factors that substantiate its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Driving Growth

Dycom’s business is gaining from solid demand for network bandwidth and mobile broadband. Also, it has been benefiting from the extensive deployment of 1-gigabit wireline networks by major customers. The company secured several converged wirelines and wireless multi-use network deployments across the country. Backed by these tailwinds, its top line grew 4.7% organically in fiscal third-quarter 2019.

Dycom continues to experience strong 12-month backlog, helping the company to post improved results. As of Oct 26, 2019, it recorded backlog of $6.349 billion, of which approximately 40% is expected to be completed over the next 12 months.

The company has undertaken several strategic initiatives to expand its market share on the back of strong financial position and diligent operational execution. The company’s solid liquidity positions it well to undertake strategic investments and acquisitions to strengthen prospects. We believe such steps will boost investors’ confidence in the stock.

Hurdles to Cross

Although it posted better-than-expected results in the last three quarters, margins were under pressure due to timing volatility from large customer programs, under absorption of labor and field costs, along with a highly competitive market. During the fiscal third quarter, gross margins contracted 92 basis points (bps) and adjusted EBITDA margins declined 120 bps from the year-ago period.

Going forward, these headwinds and seasonal fluctuations like inclement weather, fewer available work days due to holidays, reduced daylight work hours and the restart of calendar payroll taxes are expected to hurt the company’s bottom line.

Dycom has provided lower contract revenue projection of $700-$740 million, indicating a decline from $748.6 million reported a year ago. Adjusted earnings are anticipated between loss of 15 cents and earnings of 2 cents per share. The said range suggests a significant fall from the prior-year reported earnings of 10 cents per share.  

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