Dycom (DY) Sinks Despite Solid Q3 Performance: Here’s Why – Nov 28, 2022

Dycom Industries, Inc. ( DY ) fell 16.6% after releasing fiscal 2023 third-quarter earnings on Nov. 22. The Zacks Building Products – Heavy Construction industry saw a 3.1% decline over the same time frame. This Florida specialty contracting services provider has seen higher fuel costs, labor issues and supply constraints. Also, the seasonal impact on the fiscal fourth quarter concerns the company despite continued contract flow and backlog.

The company’s fiscal third quarter results reflect solid earnings and revenue performance. Top and bottom lines were up 22.1% and 77.9% year-over-year, respectively. Benefiting from higher demand for its high capacity single fiber network, expanded geographic coverage and competent network planning and schedule management services, DY posted a quarter-end backlog of $6.116 billion versus $5.896 billion a year ago after. Of the backlog, $3.276 billion is expected to be completed over the next 12 months.

However, its weak outlook for the fiscal fourth quarter and macroeconomic effects on future customer demand are a major concern. For the fiscal fourth quarter, contract revenue is expected to increase by mid-to-high single digits year-over-year. Adjusted EBITDA margin is expected to be in line with or increase modestly from last year’s levels.

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The Zacks Consensus Estimate for fiscal fourth-quarter earnings has fallen 29.6% over the past seven days to 19 cents. The same for fiscal first quarter 2024 fell 15.2% to 95 cents in one week.

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

Macro-economic headwinds: Dycom’s business has been affected by persistent macroeconomic issues such as supply chain disruption, power market volatility and labor issues. The automotive and equipment supply chain remains challenging, especially for the large truck chassis required for specialty equipment. During the fiscal third quarter, fuel costs as a percentage of total revenues increased 20 basis points. Capital equipment prices are also on the rise. Broad increases in demand for fiber optic cables and related equipment may cause volatility in delivery in the short to medium term. The Company expects these factors to influence demand in the future and thus impact DY’s business.

Seasonality: The fourth quarter of each Dycom fiscal year is prone to seasonality. Each year, fourth quarter results are impacted by inclement weather, fewer available work days, reduced daytime hours and the restart of calendar payroll taxes. Given these headwinds, the company projected mid-to-high single-digit contract revenue growth and a modest improvement in adjusted EBITDA margin.

Cyclical nature of business: Dycom’s services are highly cyclical and remain vulnerable to economic downturns. During periods of economic downturn, volatility in credit and equity markets reduces the availability of debt or equity financing, which in turn reduces capital spending by customers. Other macroeconomic factors such as foreign exchange rates may impact the business as the company has a considerable commercial presence in Canada.

Energy market woes: Fluctuations in oil prices can create significant headwinds for the company, as the cost of doing business is directly linked to rising fuel prices. Since most contracts do not allow the company to adjust prices for higher fuel costs during the term of a contract, Dycom’s inability to deal with price increases adds to its woes and directly affects 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 revenue. Lumen (the second largest customer) added 13.7% to total revenue, and Comcast accounted for 10.4% of that. Verizon and Frontier accounted for 9.1% and 8.5% of revenue, respectively. The company’s top five customers, on a combined basis, generated 66.5% of the quarter’s revenue.

Zacks Rank and other key picks

Dycom currently carries a Zacks Rank #2 (Buy). You can see full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other top stocks worth a look in the same Zacks Construction sector include Atlas Technical Consultants, Inc. (ATCX free report), Altair Engineering Inc. (Altra Free report) and EMCOR Group Inc. (EME Free Report) , each with a Zacks Rank #2.

Atlas Technical, an Austin, TX-based company, provides professional testing, inspection, engineering, environmental management and consulting programs and services throughout the United States. The company’s record balance and robust new awards pipeline reflect the business’s outlook. ATCX has become one of the largest providers of critical technical services to the infrastructure and environmental markets in the United States.

ATCX’s estimated 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 estimated earnings growth rate for 2023 is 21.5%.

Headquartered in Norwalk, CT, EMCOR provides electrical and mechanical construction and installation services throughout the United States. EMCOR benefited from solid execution in the US construction segment, which comprises the US mechanical and electrical construction units, as well as disciplined cost control. Increased acquisitions also strengthened its overall results by adding new markets, opportunities and capabilities.

EMCOR 2022 and 2023 are expected to grow by 10.2% and 17% respectively.

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