2023-03-23 08:00:00 ET
Summary
- Dycom’s revenue in the near to medium term should benefit from the healthy backlog levels and deployment of a high-speed gigabit network.
- In the long term, the company should benefit from the Infrastructure Investment and Jobs Act (IIJA) funding for telecommunications.
- Based on my DCF calculations and relative valuations, the stock is currently undervalued.
Investment Thesis
Dycom Industries ( DY ) should continue to benefit from healthy backlog levels and the deployment of a high-speed gigabit network in FY24. Telecom companies are deploying wirelines to provide high-speed connectivity through fiber and 5G. The company should also benefit from the Infrastructure Investment and Jobs Act (IIJA) funding of $40 billion for the development of telecommunications in rural America. Additionally, the $42.45 billion in funding under the Broadband Equity, Access, and Deployment (BEAD) program should benefit the company in the medium- to long-term. Overall, I believe that given the healthy growth opportunities and cheap valuations, Dycom Industries is a good buy.
Analysis & Outlook
DY's backlog order (Created by DzD Analysis by taking data from DY)
Dycom generates the majority of its revenue, i.e., approximately 67%, from the top five customers, which include AT&T ( T ), Comcast ( CMCSA ), Verizon ( VZ ), Lumen ( LUMN ) and Frontier Communications ( FYBR ). The majority of the companies in the telecommunications business are either constructing or upgrading significant wireline networks across North America. These wireline networks are set to deliver high-speed internet connectivity to individual customers and businesses alike, through fiber or wirelessly via 5G technologies.
Growth in fiber connections (Company's Investor Presentation)
The increasing consumer demand for bandwidth is continuing to drive fiber deployments. Industry estimates suggest that new fiber passings are expected to reach approximately 7.5 million in 2023, up from 6.6 million in 2022. As telecom companies like AT&T, Verizon, Frontier Communications, and others strive to expand their high-speed internet services and capture new customers, they are increasingly turning to fiber as the preferred technology to deliver the bandwidth and speed that consumers crave. Therefore, at its 2022 Analyst Day , AT&T laid out its strategy to achieve 30 million customer locations by 2025. Additionally, AT&T entered into a joint venture with BlackRock to build a multi-gigabit fiber network, which will initially be deployed to 1.5 million customer locations. As fiber networks continue to proliferate, it is estimated that more than 55% of U.S. homes and businesses will have direct fiber connections by 2025, compared to just 39% at the end of 2022. These trends bode well for Dycom Industries, which is well-positioned to benefit from the growing demand for fiber infrastructure in the telecommunications industry.
Wireless carriers are increasing 4G capacity and augmenting 4G with new 5G technologies, creating growth opportunities in the near to medium term. Wireless construction activity has increased due to the availability of new spectrum bands. In its recent earnings call , Verizon mentioned that since the launch of C-band, it is soon going to achieve 200 million POPs and is close to its investor day target of 250 million POPs. I believe the 5G deployment should continue for the rest of 2023, as it is still in its initial stages. This should benefit Dycom, given its strong presence across North America.
As more businesses become technology-centered, the need for high-speed connectivity becomes crucial, especially in rural America. The U.S. government's Infrastructure Investment and Jobs Act (IIJA) will provide $40 billion in funding for the construction of rural communications networks in unserved and underserved areas across the country. In addition to this, state-level funding for telecommunications networks was also initiated prior to the Infrastructure Act. Additionally, Dycom should benefit from the Broadband Equity, Access, and Deployment ( BEAD ) program, which will provide $42.45 billion in funding to expand high-speed internet access across the United States. Dycom provides program management, planning, engineering, design, aerial, underground, and wireless construction, and fulfillment services for gigabit deployments across North America. These deployments consist of wired network elements and wireless networks. Over the last few years, the company has increased its maintenance and operations business through capital investments. This should benefit Dycom in the long run, as the network deployments will increase the amount of outside plant network that must be maintained.
Dycom's revenue in FY24 should benefit from the healthy order backlog levels. The company's backlog at the end of FY23 increased by 5.5% Y/Y to $6.1 billion as the company booked new work and renewed existing work. In Q4 FY23, the company received fiber construction work spanning three years from Lumen. The company also received construction and maintenance agreements from BrightSpeed and fiber construction agreements from Charter, spanning one year. Of the $6.1 billion backlog order, $3.46 billion of work is expected to be completed in the next 12 months, supporting revenue growth in FY24.
In FY24, I believe the order rate should moderate due to the weakening macroeconomic conditions faced by telecom companies. AT&T mentioned in its recent conference call that it is experiencing increased labor and fuel costs. This should slow down the fiber deployment in 2023. However, Dycom should continue to receive orders related to MRO and other construction works, which should support the order backlog in FY24.
Overall, I believe Dycom's revenue in the near to medium term should benefit from the healthy order backlog levels, state-level funding, and the deployment of a high-speed gigabit network. In the long term, the company should benefit from the funding from IIJA and BEAD as well as MRO activities related to the deployment of wireline networks.
Valuation
WACC calculation (Created by DzD Analysis using DiscoverCI calculator) DCF Valuation (Created by DzD Analysis using Alpha Spread)
I arrived at the conclusion that Dycom Corporation is currently undervalued by conducting a DCF analysis. In my DCF analysis, I assumed revenue would grow in the mid-single digits in FY24 given the healthy backlog order levels. Beyond FY23, the revenue growth should be between low single-digit and mid-single-digit due to the fiber and 5G deployments. The capital expenditure in the near term should be higher as the company is investing in new equipment given the increased deployment of wirelines. I used a discount rate of 7.28% by using the cost of equity of 10.38% and a cost of debt of 3.95%, which is below the industry level , and arrived at a fair value of $100.7 for DY.
Using the relative valuation, the stock is currently trading at 17.89x FY23 consensus EPS estimate of $5.43 and 13.81x FY24 consensus EPS estimate of $7.03, which is below its five-year average forward P/E of 27.85x.
Conclusion
Overall, I believe Dycom Industries faces good tailwinds in the near to medium term due to the increased deployment of 5G and fiber. In the long term, the company should benefit from the MRO activities related to the installed wirelines across the country, creating a recurring revenue opportunity. The cheap valuation and healthy growth prospects make DY a good buy.
For further details see:
Dycom Industries: A Strong Bet In The Telecom Infrastructure Industry