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Dycom (DY) Slashes Q2 Guidance, Issues Fiscal 2019 View

Zacks Equity Research

Dycom Industries Inc. DY has recently lowered its outlook for second-quarter fiscal 2018 (ended Jan 27) ahead of the release of results (scheduled on Feb 28). Shares were down about 15% at one point in pre-market trading following the news, reflecting investors’ disappointment with the lowered guidance.

For the fiscal second quarter, the company expects to report adjusted earnings in the band of 9-12 cents per share, assuming revenues of about $655 million. This is comparable with prior projections of adjusted earnings per share in the range of 24-36 cents, on revenues within the $645-$675 million band.

On a GAAP basis, it projects diluted earnings per share in the band of $1.20-$1.23, incorporating tax benefits from the Tax Cuts and Jobs Act of 2017.

The company lowered its guidance on account of reduction in number of available workdays due to adverse weather conditions, which had an adverse impact on productivity and margins during the quarter-end. Also, the company adjusted its fiscal-year end from the last Saturday in July to the last Saturday in January, resulting in the commencement of fiscal 2019 on Jan 28, 2018.

Furthermore, Dycom provided guidance for fiscal 2019 and updated its outlook for first-quarter fiscal 2019. For the fiscal year, the company anticipates revenues to be in the range of $3.30 to $3.50 billion, with diluted earnings per share within $5.22-$6.14. For first-quarter fiscal 2019, the company expects adjusted earnings per share in the band 63-78 cents, assuming revenues to lie between $720 million and $750 million.

Our Take

Dycom has had an impressive run over the past few quarters, with an earnings beat streak that has lasted for seven consecutive quarters.

Going forward, we believe that favorable industry trends like surging demand for 1 Gigabyte deployments, huge investment in wireline networks and cable capacity projects are likely to bode well for the company. Meanwhile, the industry is witnessing a dramatically increasing network bandwidth with major industry participants deploying significant 1 gigabit wireline networks. In the past few quarters, the company has gained profitable market share, extended geographic reach as well as expanded program management network planning services, which have added to its growth.

Moreover, the company anticipates engineering and construction activity to increase throughout this year. In fact, several large programs have already gained momentum and many new contracts commenced meaningful activity, thus propelling Dycom’s growth. Also, emerging wireless technologies are fuelling wireline investments growth and the company remains optimistic that a complimentary wireline investment cycle is round the corner. In the past three months, the Zacks Rank #3 (Hold) company has returned 27.2%, outperforming the industry’s gain of 6.6%.

Dycom also has a strong portfolio of customers like the telecom and wireless equipment biggies such as AT&T, Comcast, CenturyLink and Verizon, to name a few. In the first quarter fiscal 2018, about 74.9% of the company’s total revenues were derived from its top five customers. Moving ahead, we expect the company to further benefit from its collaboration with such renowned telecom operators. Moreover, the company’s strong financial position coupled with diligent operational execution allows it to undertake strategic initiatives for expanding market share.

However, the U.S. telecommunications industry is facing intense pricing competition. Severe spectrum crunch, coupled with gradual Smartphone and tablet adoption, are compelling wireless operators to seek other options for raising revenues.

Stocks to Consider

Some better-ranked stocks from the same space are Potlatch Corporation PCH, D.R. Horton, Inc. DHI and Jacobs Engineering Group Inc. JEC. While Potlatch Corporation sports a Zacks Rank #1 (Strong Buy), D.R. Horton and Jacobs Engineering Group carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Potlatch Corporation has surpassed estimates thrice in the trailing four quarters, with an average positive earnings surprise of 36.9%.

D.R. Horton has outpaced estimates thrice in the preceding four quarters, with an average earnings surprise of 5.8%.

Jacobs Engineering Group has surpassed estimates in the preceding four quarters, with an average positive earnings surprise of 11.4%.

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