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Dycom (DY) Sinks Despite Solid Q3 Performance: Here's Why

Dycom Industries, Inc. (DY) dropped 16.6% post its third-quarter fiscal 2023 earnings release on Nov 22. The Zacks Building Products - Heavy Construction industry registered a fall of 3.1% in the same time frame. This Florida-based specialty contracting service provider has been witnessing higher fuel costs, labor woes and supply constraints. Also, seasonal impacts on fiscal fourth-quarter are concerning the company despite continuous contract flow and backlog.

The company’s fiscal third quarter results reflect solid earnings and revenue performance. The top and bottom lines increased 22.1% and 77.9% on a year-over-year basis, respectively. Benefiting from higher demand for a single high-capacity fiber network, extended geographic reach, and proficient program management and network planning services, DY posted a quarter end backlog of $6.116 billion versus $5.896 billion a year ago. Of the backlog, $3.276 billion is projected to be completed in the next 12 months.

Yet, its weak outlook for the fiscal fourth quarter and macro-economic effects on future customer demand are a major concern. For the fiscal fourth quarter, it expects contract revenues to grow in mid- to high single digits year over year. The adjusted EBITDA margin is expected to be in line or increase modestly from year-ago levels.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

The Zacks Consensus Estimate for fiscal fourth 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.

Let’s discuss the factors ailing this company’s growth trajectory.

Macro-Economic Headwinds: Dycom’s business has been impacted by persistent macroeconomic issues like supply chain disruption, energy market volatility and labor woes. The automotive and equipment supply chain remains challenging, particularly for the large truck chassis required for specialty equipment. During the fiscal third quarter, fuel costs as a percentage of total revenues grew 20 basis points. The prices of capital equipment are also increasing. Broad increases in demand for fiber optic cable and related equipment may cause delivery volatility in the short to intermediate term. The company expects these factors to likely impact demand in the future and thus impact DY’s business.

Seasonality: Dycom’s fourth quarter of every fiscal year is prone to seasonality. Each year, its 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 modest improvement in adjusted EBITDA margin.

Cyclical Nature of Business: 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 cost of conducting business is directly 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.

Sales Concentration: A significant portion of Dycom’s sales come from its top five customers. During the third quarter of fiscal 2023, Dycom’s largest customer, AT&T, contributed 24.8% to total revenues. Lumen (the second-largest customer) added 13.7% to total revenues and Comcast made up 10.4% of the same. Verizon and Frontier represented 9.1% and 8.5% of revenues, respectively. The company’s top-five customers, on a combined basis, generated 66.5% of revenues for the quarter.

 

Zacks Rank & Other Key Picks

Currently, Dycom holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other top-ranked stocks that warrant a look in the same Zacks Construction sector include Atlas Technical Consultants, Inc. ATCX, Altair Engineering Inc. ALTR and EMCOR Group Inc. EME, each carrying a Zacks Rank #2.

Atlas Technical, an Austin, TX-based company, provides professional testing, inspection, engineering, environmental and program management and consulting services in the United States. The company’s record backlog and robust new award pipeline reflect the business’ prospects. ATCX has become one of the largest providers of mission-critical technical services for infrastructure and environmental markets in the United States.

ATCX’s expected earnings growth rate for 2023 is 76.9%.

Altair Engineering provides software and cloud solutions in simulation, high-performance computing, data analytics and artificial intelligence worldwide.

ALTR’s expected earnings growth rate for 2023 is 21.5%.

Headquartered in Norwalk, CT, EMCOR provides electrical and mechanical construction and facilities services in the United States. EMCOR has been benefiting from solid execution in the U.S. Construction segment — comprising the U.S. Mechanical and Electrical Construction units — as well as disciplined cost control. Also, accretive buyouts have been strengthening its overall results by adding new markets, opportunities and capabilities.

EMCOR’s 2022 and 2023 are expected to grow 10.2% and 17%, respectively.

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