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High Cost, Low Backlog to Hurt Dycom's (DY) Q2 Earnings

Zacks Equity Research

Dycom Industries, Inc. DY is scheduled to report second-quarter fiscal 2020 results on Aug 28, before the opening bell.

In the last reported quarter, the company’s earnings topped the Zacks Consensus Estimate by 23.3% but declined 18.5% from the prior-year period due to higher-than-expected costs related to a large customer program. The same is likely to hurt results in the quarter to be reported.

This specialty contracting services provider — which shares space in the Building Products - Heavy Construction industry with EMCOR Group, Inc. EME, MasTec, Inc. MTZ and North American Construction Group Ltd. NOA — has broadly underperformed the industry year to date. The stock has lost 25.1% against its industry’s growth of 12.3% in the said period.

Let’s see how things are shaping up for this announcement.

How are Estimates Faring?

Let’s take a look at the estimate revision trend in order to get a clear picture of what analysts are thinking about the company prior to the earnings release.

For the to-be-reported quarter, Dycom’s earnings are projected at 84 cents per share, which indicates a decrease of 20% from the year-ago period. Revenues are estimated to be $860.49 million, suggesting growth of 7.6% from the year-ago quarter.

Dycom Industries, Inc. Price and EPS Surprise

Dycom Industries, Inc. Price and EPS Surprise

Dycom Industries, Inc. price-eps-surprise | Dycom Industries, Inc. Quote

Factors at Play

Dycom’s fiscal second-quarter results are likely to be negatively impacted by under absorption of labor and field costs. The company pointed out that although major customers have stepped up infrastructure spending, higher-than-expected cost of a large customer program is expected to dent margins.

Despite reporting strong contract revenues in the last reported quarter, the company has been vulnerable to timing uncertainty, post initiation of large-scale network deployments. The same is likely to hurt its fiscal second-quarter results. In fact, the company anticipates adjusted earnings within the range of 70-92 cents per share, implying a decrease from the year-ago profit level of $1.05. Adjusted EBITDA margin is also likely to decrease from the year-ago period.

Dycom has been undertaking strategic initiatives that are eventually inflating costs, which might hamper the bottom line. Also, accelerated complexity of the above-mentioned program raises a concern. These headwinds are expected to hurt its profitability in the quarter to be reported.

Although Dycom has a solid track record of booking new contracts and renewing the existing ones, its existing backlog level — which enhances visibility for the to-be-reported quarter — is discouraging. Markedly, the Zacks Consensus Estimate for backlog is pegged at $7.105 billion, suggesting a 9.8% decrease from the prior-year figure of $7.881 billion.

Despite the above-mentioned headwinds, the company has been immensely benefiting from extensive deployment of 1-gigabit wireline networks by major customers. The same is expected to benefit fiscal second-quarter revenues as well. For the fiscal second quarter, the company expects revenues in the range of $835-$885 million, pointing to growth from the year-ago figure of $799.5 million.

What the Zacks Model Says

Our proven model does not conclusively show that Dycom is likely to beat estimates in the to-be-reported quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Dycom currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Meanwhile, we caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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