Summary:
Dycom has a robust earnings surprise history, registering an average positive
earnings surprise of 19.6% over the last four trailing quarters. Encouragingly, the
company’s current year earnings estimates have gone up 1.6% over the past 30
days. Rise in demand for network bandwidth is proving to be beneficial for the
company. Extensive deployment of 1-Gigabyte wireline networks and the ongoing
Connect America Fund II project propelled growth for the company. Dycom’s solid
track record of contract wins, strong customer relationships and the ability to renew
existing ones add to its strength. Also, Dycom’s solid backlog levels hint at better
prospects, going forward. Meanwhile, the company is dedicated toward enhancing
investors’ wealth through share buybacks. However, uncertainties in the
macroeconomic environment, especially fluctuations in oil prices and unfavorable
weather conditions, remain headwinds for the company.
Reasons To Buy:
- Dycom’s business primarily benefits from increased demand for network bandwidth and mobile broadband, given the proliferation of smart phones. In the reported quarter, the company has particularly benefited from extensive deployment of 1-Gigabyte wireline networks by major customers. As telecommunications networks face increased demand, customers need to expand the capacity and improve the performance of existing networks and in certain instances deploy new networks. Most of the telecommunication companies are deploying fiber-to-the-home and fiber-to-the-node technologies to enable video offerings and 1-gigabit high-speed connections, thereby producing significant opportunities for Dycom. Encouragingly, Dycom’s engineering & design and aerial and underground construction services are experiencing solid growth, backed by the strength of 1 gigabit deployments. Interestingly, one of the key customers of the company has articulated plans to deploy speeds to 10 gigabits which in turn across represents a huge array of lucrative opportunities for existing customers. Additionally, cable capital expenditure is rising rapidly as cable operators continue to deploy fiber in small and medium businesses. Going forward, the company believes that surging demand for 1 gigabit deployments from several large customers, huge investment in wireline networks, cable capacity projects and ongoing Connect America Fund II project will significantly drive growth in market share.
- Dycom has a strong portfolio of customers, primarily the telecom and wireless equipment biggies such as AT&T, Comcast, CenturyLink and Verizon, to name a few. In the reported quarter, about 72.5% of the company’s total revenue was derived from its top five customers, a year-over-year increase of 48.9% on an organic basis. Encouragingly, five of the six top customers have experienced growth on an organic basis in the reported quarter, for the fifth consecutive time since the second quarter of fiscal 2008. We expect the company to further benefit from its collaboration with such renowned telecom operators. Moreover, the company remains hopeful regarding the rise in capital-spending initiatives by its key clients. Calendar year 2015 witnessed massive investments for wireline networks, much higher than that in the 90’s, allowing customers to embark on multi-year capital spending initiatives. This is providing Dycom with ample opportunities to drive growth through market share and geographic footprint expansion. Also, fluctuations in customer spending have declined adding to Dycom’s bliss. Encouragingly, timing uncertainty in network strategies has also reduced and revenue growth accelerated aided by new industry standards in the quarter, thus adding to Dycom’s confidence. Going forward, we expect a recovering economy and solid industry environment, fuelled by huge network investments, to offer favorable commercial opportunities for Dycom.
- Dycom has registered a healthy backlog level of $5.649 billion at the end of the third quarter, reflecting a sequential increase of $593 million. Of this backlog, approximately $2.212 billion is expected to be completed within the next 12 months. The company continues to book new and renew existing. In the reported quarter, the company secured a new construction and maintenance services contract from Century Link in Washington and Verizon in Massachusetts. This apart, it won engineering and construction services agreements from Windstream in Iowa, Missouri, Nebraska, Oklahoma, Arkansas, Texas and Pennsylvania. From AT&T, the company clinched a construction and maintenance services contract in Kentucky and a wireless construction deal in Kentucky, Georgia and Florida. Meanwhile, the company extended its construction and maintenance service agreements in California, Arizona and Texas with Time Warner Cable. Going forward, we expect the company’s string of contract wins and strong customer relationships to act as growth drivers.
- Dycom’s strong financial position, coupled with diligent operational execution, allows it to undertake strategic initiatives for expanding market share. The company has an ardent eye for acquisitions to expand its geographic presence and acquired businesses contributed $30.8 million of revenue during the third-quarter of fiscal 2016. Exiting the quarter ending Jan 23, 2016, Dycom had liquidity of over $197 million under credit facility and cash on hand. Such a strong cash position allows it to undertake strategic investments and acquisitions to reinforce growth prospects. Such activities help Dycom to grow its business and gain access to newer technologies and markets across geographies. The company made some changes in net working capital which contributed toward operating cash flow improvement, while still providing the necessary resources for investment to support growth. Finally, reflecting its commitment toward improving shareholders’ wealth, the company repurchased around 1.56 million shares for $100 million, reducing shares outstanding by 4.7% during the third quarter of fiscal 2016. Moreover, the company has authorized to repurchase up to an additional $100 million of shares over the next 17 months. At the end of the quarter, the company had $214 million drawn on the revolver and $150 million outstanding on the term loan. On May 25, 2016, it boosted its liquidity with an incremental term loan of $200 million. We believe such steps will boost investor’s confidence in the stock.
Risks:
- Presently, 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. Massive promotional expenditure and cut-throat pricing competition are major concerns presently plaguing the industry. To top it all, the proposed regulations regarding the Net neutrality is limiting the visibility to the company’s growth, going forward. Net neutrality, if accepted, would imply an open-Internet atmosphere that will bar the Internet Service Providers, especially telecom and cable TV operators, from discriminating against applications. The Federal Communications Commission’s (FCC) rules of net neutrality are likely to impact the company adversely. Moreover, the telecommunication industry is highly dynamic in nature which continues to experience rapid technological, structural and competitive changes and may reduce the service requirements from Dycom thereby impacting financial performance adversely.
- Dycom’s business can be significantly impacted by inclement weather conditions as a large portion of its work is done outdoors. Financial results of the company are prone to seasonal fluctuations as a significant portion of work is conducted outdoors. Consequently, extended periods of adverse weather impact the company’s earnings during the winter, especially during second and third fiscal quarters. For instance, severe snowfall and exceptionally cold temperatures result in lower number of available workdays for the company, which in turn, has an unfavorable impact on productivity and margins. As a matter of fact, pronounced seasonal impact from businesses acquired by the company in 2015 has hurt earnings significantly in the past and is also likely to impact the third-quarter results. Moreover holidays, reduced daylight work hours and the restart of calendar payroll taxes also add to Dycom’s woes. As these factors are beyond the control of the company they render it vulnerable to margin volatility.
