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Here's Why Investors Should Hold on to Dycom (DY) Stock Now

Zacks Equity Research

Strength in telecommunication business, solid backlog and consistent contract flows bode well for Dycom Industries, Inc. DY. The company’s strong financial position and diligent operational execution also helped it to deliver stellar performances.

Recently, the company posted better-than-expected first-quarter fiscal 2020 results, wherein both earnings and revenues surpassed the Zacks Consensus Estimate by 23.3% and 8.2%, respectively.

However, higher-than-expected costs related to large customer program, intense pricing competition and timing uncertainty pose concerns. Shares of Dycom have declined 3.1% so far this year, comparing unfavorably with its industry’s growth of 13.1%.



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

Factors Driving Growth

Dycom’s business is gaining significantly from solid demand for network bandwidth and mobile broadband. Also, the company has benefited from the extensive deployment of 1-gigabit wireline networks by major customers over the past few quarters. Furthermore, it secured several converged wirelines and wireless multi-use network deployments across the country. In the fiscal first quarter, the company’s total contract revenues and organic revenues improved 14% and 15.8%, respectively, year over year.

These apart, Dycom continues to experience strong 12-month backlog that helped the company to post better top-line results. As of Apr 27, 2019, it recorded backlog of $7.051 billion, of which approximately 38.6% is expected to be completed over the next 12 months. Going forward, the company projects contract revenues within $835-$885 million for the fiscal second quarter, more than $799.5 million recorded in the comparable period last year.

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, Dycom acquired certain assets and assumed certain liabilities of a telecommunications construction and maintenance services provider in the Midwest and Northeast United States. During the fiscal first quarter, buyouts contributed $6.1 million to total contract revenues with liquidity of more than $358.9 million, comprising credit facility and cash on-hand.

Concerns

Dycom’s business has been hurt by timing volatility due to large customer programs, customer spending modulations, and under absorption of labor and field costs over the past few quarters. During the fiscal first quarter, adjusted earnings declined 18.5% on a year-over-year basis. Also, gross margins contracted 61 basis points (bps) due to said headwinds.

Given the weak profit level, the company anticipates the fiscal second-quarter adjusted earnings in the range of 70-92 cents per share, significantly below the year-ago level of $1.05 per share. The adjusted EBITDA margin is also expected to decrease from the year-ago period. Moreover, in the fiscal third quarter, Dycom’s revenues and margins are expected to decline significantly from the year-ago level.

Additionally, the U.S. telecommunications industry has been facing intense pricing competition. In fact, massive promotional expenditure and cut-throat pricing competition are plaguing the industry over the past several quarters. As the telecom industry is highly dynamic in nature and experiences rapid technological, structural and competitive changes, Dycom’s performance might be hurt due to higher expenses and dynamic changes.

Stocks to Consider

Some better-ranked stocks in the same industry include EMCOR Group, Inc. EME, Great Lakes Dredge & Dock Corporation GLDD and North American Construction Group Ltd. NOA, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

EMCOR is expected to register an earnings growth rate of 6.2% this year.

Great Lakes’ earnings growth rate for 2019 is expected to be 300%.

North American Construction Group has an expected earnings growth rate of 221.4% for 2019.

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