Dycom Industries, Inc. was founded in Florida in 1969 (NYSE:DY) has grown to become a major player in the U.S. telecommunications industry. It provides professional services to the telecommunications and utility sectors in the United States.
company’s The service is divided into two parts.
Engineering Services: Includes planning, design and project management of wired and wireless cabling systems.
Construction, maintenance and installation services: Involving tasks such as fiber optic and cable laying, trench excavation and facility maintenance. These services are targeted at phone companies and cable TV operators, among others.
Essentially, DY is a versatile one-stop shop, providing expertise and labor to telecommunications and utility companies across the country.
The company primarily serves major telecom customers, including AT&T (T), Verizon (VZ), Lumen Technologies (LUMN), Comcast (CMCSA), and others.also In addition to telecom customers, the company also generates about 10% of its revenue from utility companies. This revenue is generated through long-term contracts obtained through competitive bidding or occasional extensions of previous service contracts.
Financial Analysis and Outlook
For fiscal 2023 (ending January 2023), the company reported strong organic revenue growth of 21.4% year-over-year to $3.8 billion. The surge in revenue was mainly attributed to the easing of supply chain constraints, leading to accelerated conversion of backlog orders.
Growth momentum was maintained throughout all three quarters of fiscal 2024; however, year-over-year organic revenue growth slowed sequentially from last year. Specifically, the company reported year-over-year organic revenue growth of 19.1%, 7.1%, and 4.6% in the first, second, and third quarters, respectively. The slower growth trajectory can be attributed to the challenging year-on-year comparison due to supply chain easing experienced during the period.
Nevertheless, the strength of underlying demand has emerged, with the number of backlog orders increasing to a record high of US$6.61 billion, a year-on-year increase of 8.12%. Of this $6.61 billion in backlog, $3.83 billion is expected to be realized over the next 12 months.
Looking ahead, I expect the company’s growth may slow somewhat in the fourth quarter of 2024, primarily due to a challenging year-over-year comparison. However, the recently acquired Brigham Cable Construction is expected to contribute approximately $50 million to revenue in the next quarter.
In the long run, I believe DY will benefit from the ongoing construction and upgrade of cable networks by major telecom operators. As U.S. consumers increasingly prefer higher-speed Internet access. Telecommunications giants such as AT&T and Verizon are actively working to expand their high-speed Internet services by investing more in high-speed cable networks.
As of 2022, a total of 58 million fiber channels have been established in the United States. Several telecommunications providers have committed to investing heavily in building another 42 million fiber optic channels over the next few years. These new fiber channels are expected to generate additional revenue opportunities for DY in the foreseeable future.
In addition to the commitments from telcos, DY will benefit from government-backed financing schemes such as Broadband Equity, Access and Deployment [BEAD]. This is a $42 billion federal funding program designed to provide broadband services to remote and underserved areas of the United States. Implementation of the plan is expected to benefit DY’s top line starting in 2024.
Regarding margins, I expect the company’s adjusted EBITDA margins will likely exceed its five-year average of 9%-10%. There are two reasons why I conclude that adjusted EBITDA margins are higher.
First, as mentioned earlier, capital expenditures on fiber optic line networks by various telecom operators are expected to surge in the near future, which is expected to intensify competition for the services provided by DY. As one of the major players in the space, DY is poised to negotiate favorable contract terms that will boost its profit margins.
Secondly, in the past few years, DY has continued to reduce its dependence on major customers. The company has managed to reduce its revenue dependence on its top five customers from 78.4% in FY20 to 54.4% in the trailing twelve months (TTM). This diversified revenue stream will give the company greater negotiating power with large customers, which will also lead to improved profit margins.
Overall, higher revenue growth and higher profit margins compared to historical averages are expected to benefit DY’s bottom line, helping to boost earnings per share (EPS) growth in the foreseeable future.
From a valuation perspective, DY appears to be an attractive investment opportunity. Currently, its stock price is US$100.6 per share, equivalent to a TTM price-to-earnings ratio of 13.6 times and a TTM EBITDA ratio of 8.28 times.
Both valuation ratios are currently at the lower end of their respective ranges, indicating that the market expects the company’s earnings growth to slow. This is consistent with a broader trend affecting many cyclical stocks, resulting in lower P/E ratios for such stocks.
In contrast, I don’t think DY deserves a similar valuation given the revenue and profit prospects highlighted in this article. I think the company should be valued at at least 10x its trailing 12-month EV/EBITDA average over the past five years. I think this valuation approach is reasonable because DY’s growth prospects have not changed, on the contrary, the prospects have improved.
DY Industries generates revenue from cyclical industries, a factor that has historically affected DY’s earnings during downturns in economic cycles. While this concern is valid, I still believe that underlying industry demand, telecom capex, and government funding will be important drivers for the company amid a broad economic downturn. Therefore, I think the stock should outperform the market.
Notably, 54.4% of DY’s TTM revenue comes from its top five customers. Although the company is actively reducing its reliance on these key customers, they still represent a high proportion of the revenue mix.
Dycom Industries has shown resilience and growth potential in the telecom space. Although year-over-year growth has slowed slightly, the company will benefit from expanding demand for wireline networks. Expected higher profit margins, reduced revenue concentration, and favorable valuation multiples highlight DY’s attractiveness as an investment.
While I acknowledge industry cyclicality, strong tailwinds such as telcos’ wireline infrastructure spending and investments through the BEAD program should help the company weather potential downturns. Therefore, I am bullish on the stock.