2023-09-11 17:39:28 ET
Summary
- The company reported strong quarterly results and is expected to sustain its growth through industry tailwinds and its recent acquisition of Bigham Cable Construction.
- The company reported a contract revenue of $1.04 billion, up 7.22% compared to $0.97 billion in Q2FY23.
- After comparing the forward P/E ratio of 16.39x with the sector median of 17.23x, we can say that the company is undervalued.
Investment Thesis
Dycom Industries ( DY ) is a provider of contracting services to the utilities industries and telecommunications infrastructure in the United States. It has reported strong quarterly results and I believe it can sustain its growth in the future as a result of industry tailwinds and its recent acquisition of Bigham Cable Construction.
About DY
DY offers specialty contracting services to the utilities industries and telecommunications infrastructure in the United States. Its comprehensive portfolio includes specialty services such as program management, engineering & design, planning, maintenance, underground, aerial & wireless construction, and fulfillment services. The Engineering services are mainly offered to the telecommunications provider and consist of planning and designing copper, fiber optic, and coaxial cable systems extending from a telephone hub to a consumer’s home. It also develops wireless setups linked to deploying macro cells and new small cell sites. In addition, it provides Construction, Maintenance, and Installation Services which also comprise splicing and placement of cables. The company offers its services to three types of customers: Telecommunications, Underground facility locating, and Electrical & gas utilities. DY generates 89.7% of its revenue from Telecommunication customers, while revenue from Underground facility locating customers represents 7.2% of the total company’s revenue. The revenue from Electrical & gas utilities is 3.1% of the DY’s total revenue.
Financials
Revenue Trends of DY (Seeking Alpha)
The global COVID-19 pandemic has significantly increased the importance of communication technologies due to the adoption of a remote working culture, which has also translated into strong revenue growth of the company in FY2020. DY has reported revenue of $3.34 billion in FY2020, which is 6.71% YoY growth compared to $3.13 billion in FY2019. The company’s revenue has increased from $3.13 billion to $3.81 billion, which has resulted in 5-year CAGR of 4.01%. The industry experienced significant growth in the past five years due to the increased usage of mobile phones and the need to access high-speed internet. However, rural coverage has remained comparatively low despite the high demand for bandwidth. To address this need, the government has made high investments in infrastructure deployment, which can help the industry to gain significant momentum. It has also introduced programs to increase the access and deployment of internet infrastructure. Federal investment has added around 30 million rural fiber passings that were previously inaccessible. A non-wired approach is anticipated to service around 10 million rural passings. This growing focus in the rural areas has created several opportunities for the participants in the telecom and related businesses. Identifying these opportunities, the company has recently acquired Bigham Cable Construction which mainly offers telecommunications construction services in the southeastern United States. It has reported a revenue of $140 million over the last year. It has managed to construct over 275,000 miles of plant to date, which reflects its strong presence in the southeastern parts. I believe that by capitalizing on the opportunities in rural broadband deployments through this acquisition, the business can be able to expand deeper into rural regions and acquire greater market share by expanding its profit margins as Bigham is one of the strong players in the telecommunications industry with wide service offerings and large customer base. Further, this growth can be sustainable for a longer period as 5G deployments are also rapidly increasing with heavy investments of $80 billion. The 5G deployment might ensure positive momentum in the industry for this decade, and the company can benefit from it by leveraging its strong capabilities and increased customer base.
The company recently reported its quarterly results on August 23rd . It reported a contract revenue of $1.04 billion, up 7.22% compared to $972.3 million in Q2FY23. This growth was mainly fueled by the increased customer base of the company. The company has managed to beat the market’s revenue expectations by $10 million, or 0.97%. Net income saw a healthy 37.37% YoY growth from $43.85 million to $60.24 million. The increased net income resulted in a diluted EPS of $2.03. The company has managed to surpass the market’s EPS consensus by $0.37 or 22.3%. DY reported $83.37 million in liquidity and adjusted EBITDA stood at $130.8 million. It has also recently authorized a share repurchase program of $150 million.
Increasing Breadth and Opportunity (Investor Presentation: Slide No: 11)
The strong financial results reflect the company’s healthy positioning and show its successful alignment of achieving organic growth by utilizing the growing opportunities in the industry. I believe it can sustain its performance in the coming quarters as it is continuously focused on capitalizing on opportunities in rural areas through acquisitions. The management also has an optimistic view on the growth, and therefore it expects $30 million of acquired revenues in the third quarter and EBITDA to increase by 50 to 100 basis points YoY. According to Seeking Alpha, the company’s revenue for FY2024 might be $4.17 billion, which is 31.1% YoY growth. Observing DY’s robust growth and expanded operations, I believe these estimates are accurate. The management has confirmed in recent earning call that the company has experienced strong organic growth in the last six quarters, which has led to solid margin expansion in the last six quarters. Therefore, I am only considering the net income margins of last six quarters while calculating average net income margin to estimate the full-year net income margin.
Average Net Income Calculation of DY (Value Quest)
After considering opportunities in rural broadband deployments and guidance for Q3FY24, I think the company can sustain a net income margin of 4% in the next two quarters. The revenue estimate of $4.17 billion and net income margin of 4% gives the EPS estimate of $6.01 for FY2024.
What are the Main Risk Faced by DY?
Dependency on Limited Customers:
DY is dependent on a small number of clients, as it generates a significant amount of its revenue from its top five customers. The company has earned 66.7%, 66.2%, and 74.1% of its contract revenue from the top five clients in FY2023, FY2022, and FY2021, respectively. The industry in which the company operates is highly competitive. If the competitor offers comparable services to any of these customers at more favorable pricing it can lead to a loss of customer which can significantly affect revenue of DY.
Risk of Seasonality and Adverse Weather:
The company is highly exposed to the risk of seasonality and adverse weather conditions as it performs a majority of its operations outdoors. Adverse weather conditions are mostly observed during the winter with greater frequency and severity. In addition, extreme weather conditions such as tornados, winter storms, and natural disasters such as hurricanes, floods, and tropical storms can impact the company’s operations. If this adverse climatic condition occurs, the company might also face reduced demand, which can further contract its profit margins.
Valuation
The connectivity in the rural areas has not been adequate as per the need. To address this need, the government has made huge investments in internet infrastructure, which has created a positive trend in telecom construction as well. I believe the company’s plans to expand its operations by acquisitions can accelerate its growth by helping it serve a large number of customers and capture the growing demand, especially in the rural regions. After considering all the above factors, revenue estimate of $4.17 billion & net income margin of 4%, I am estimating EPS of $6.01 for FY2024 which gives the forward P/E ratio of 16.39x. The company’s forward P/E ratio is 4.86% lower compared to sector median P/E ratio of 17.23x. After comparing the forward P/E ratio of 16.39x with the sector median of 17.23x, we can say that the company is undervalued. However, DY’s 5-year average P/E ratio is 23.53x, which indicates that the company has tendency to trade significantly higher than the sector median. I believe the company might grow in the coming quarters as a result of positive demand in the industry and its recent acquisition, which can help it to trade at its 5-year average P/E ratio. Therefore, I estimate the company might trade at a P/E ratio of 23.53x in FY2024, giving the target price of $141.42, which is a 43.57% upside compared to the current share price of $98.50.
Conclusion
The company is experiencing a massive demand, which is reflected in its strong financials. I believe the significant tailwinds in the telecom industry can create several opportunities for the participants in the construction line, as the need for broadband infrastructure is essential in each sector. Although the company has reported robust growth, its recent acquisition of Bigham Cable Construction can still help it exploit the opportunities in rural broadband deployments and increase its profitability. However, it is exposed to the risk of seasonality which can affect its operations resulting in lower profit margins. The stock is undervalued, and we can expect a healthy 43.57% growth from the current price levels as a result of its recent acquisition of Bigham Cable Construction, which can increase its contract revenues. Considering all these factors, I assign a buy rating to DY.
For further details see:
Dycom Industries: Bigham Cable Construction Should Accelerate Growth