Strong demand in Telecommunication business along with consistent contract flow bode well for Dycom Industries, Inc.’s DY. However, soft 2019 earnings projections and stiff competition raise concerns. Meanwhile, Dycom's shares have lost 52.8%, underperforming its industry’s decline of 30.8% in the past year.
Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).
Factors Driving Growth
Solid Telecommunication Business: During the third quarter of fiscal 2019, the company’s telecommunication business added a significant 91.1% to total contract revenues. This was mainly driven by higher demand for network bandwidth and mobile broadband. In fact, it has been benefiting immensely from extensive deployment of 1-gigabit wireline networks by major customers.
Contracts to Bolster Top Line: Dycom continues to experience strong 12-month backlog. As of Oct 27, 2018, its 12-month backlog came in at $7.313 billion, up from the fiscal 2018 level of $5.847 billion. Of this backlog, more than 35% of the work is expected to be completed over the next 12 months. Meanwhile, Dycom has successfully increased the long-term value of maintenance business over the past few years.
Inorganic Moves to Expand Business: In March 2018, Dycom acquired notable assets and assumed certain liabilities of a telecommunications construction and maintenance services provider in the Midwest and Northeast United States. In fact, it has an ardent eye for acquisitions to expand its geographic presence in fiscal 2019 as well.
Causes of Concerns
Dismal 2019 View: Dycom’s non-GAAP earnings declined 28.7% year over year in the last three quarters. Gross margins were down 233 basis points in the same period, reflecting under-absorption of labor and field costs of large customer programs. The overall performance was impacted by large-scale deployments that were slower than expected due to customer timing and tactical considerations.
Again, the company anticipates these factors to affect its performance in the upcoming quarters. The company now expects adjusted earnings for fiscal 2019 within $2.70-$2.92 versus $2.62-$3.07 per share expected earlier. Adjusted EBITDA, as a percentage of contract revenues, is now expected in the range of 10.7-10.8% (versus 10.7-11.1% projected earlier).
Seasonal Fluctuations: Dycom’s business is prone to severe weather conditions, as a major portion of its operations is outdoor-based. Its fiscal fourth-quarter results are likely to be 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 reported in the year-ago period.
Competition Persists: The telecommunication industry is highly dynamic in nature, and experiences rapid technological, structural as well as competitive changes. Dycom’s earnings are likely to get affected by incremental R&D costs, as well as reduced service requirements.
Stocks to Consider
Some better-ranked stocks in the Zacks Construction sector are Altair Engineering Inc. ALTR, Lennox International, Inc. LII and EMCOR Group, Inc. EME, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Altair’s earnings are expected to grow 23.1% in 2018.
Lennox’s 2018 earnings are expected to grow 18.3%.
EMCOR’s earnings for the current year are expected to increase 20%.
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