2023-12-01 05:18:26 ET
Summary
- Dycom Industries is a buy due to its growth and profitability compared to competitors in the telecommunications industry.
- The demand for fiber optics technology and 5G infrastructure is expected to drive solid expansion in the industry.
- Dycom has the capacity for additional growth and increasing market share, and its valuation metrics indicate it is priced for a buy.
Investment Thesis
Dycom Industries, Inc. ( DY ) warrants a buy rating due to its strong growth and profitability compared to major peer competitors. Additionally, the telecommunications industry is expected to see solid expansion over the next decade due to the demand for fiber optics technology and 5G infrastructure. Dycom is uniquely suited to fulfill this demand due to its capacity for additional growth and increasing market share. Finally, DY's valuation metrics indicate that it is priced for a buy at current levels.
Company Overview and Competitors
Dycom Industries has been around for over 50 years and has become an industry leader in telecommunications in the past couple of decades. In particular, the company provides labor and equipment to produce infrastructure for gas, electric, and high-bandwidth communication customers. Most recently, this has included fiber-optic and 5G technology.
Dycom's customer base is concentrated around several large companies including AT&T, Lumen Technologies, Comcast, and Verizon. With a market capitalization of almost $3B, key competitors in the $1.5B and $4.5B market capitalization range are Primoris Services ( PRIM ), MasTec ( MTZ ), Arcosa Inc. ( ACA ), MYR Group Inc. ( MYRG ), and MDU Group ( MDU ).
DY has a 5-year share price CAGR of over 9% and a 10-year CAGR of about 14%. This price return has been relatively average in comparison to leading competitors. However, as I will discuss later, DY has demonstrated growth and profitability which indicates that the company will be capable of jolting ahead of its competition moving forward.
Strong Industry Growth
Globally, there is increasing demand for high-bandwidth communication. To fulfill this demand, companies like Dycom support the telecommunications industry by providing fiber optic cabling and 5G (the fifth generation of wireless) network architecture. Both segments of the industry are expected to see solid growth in the United States.
First, the fiber optics market size is expected to expand with a CAGR of 9.2% through 2028, with North America being the fastest-growing market. While fiber optics installation is more expensive for companies to install, it is cheaper for customers to access. Although only modest growth is expected in the fiber optics market, it is expected to be steady into the next decade.
Second, the 5G network is expected to see even more exciting growth. The U.S. market CAGR for the 5G market is expected to be 25.8% through 2030 . This is primarily fueled by smart cities and the "Internet of things." Although it is costly to set up 5G network architecture, it can be profitable for telecommunications companies as its service covers a wide area, thereby reaching many customers.
Solid Growth and Profitability
Dycom has capitalized on the growth of both fiber-optic cabling and 5G networks. Most recently, DY had a very strong Q3 23 with a gross profit growth of 18% over Q2 '23. However, Q3 was not an anomaly. Dycom has seen three consecutive quarters of increasing net income. Dycom also saw $1.02B in revenue from telecommunications, its largest business segment (90.1%), in Q3 '23. That represents 10% growth in this business segment from just the previous quarter of $927M.
With $6.14B backlog in business at the start of 2023, Dycom shows no signs of slowing growth. The company also has a gross profit margin greater than the five other major competitors examined. Most impressively, Dycom has a net income 3-year CAGR that far surpasses its competitors at over 100%.
Income and Profit Metrics for Dycom and Major Competitors
DY | ACA | MYRG | MDU | PRIM | MTZ | |
Net Income 3-Year CAGR | 100.48% | 34.74% | 19.68% | -1.08% | 9.10% | -35.24% |
Gross Profit Margin | 19.43% | 19.25% | 10.37% | 16.50% | 10.57% | 11.95% |
EBITDA Growth FWD | 30.06% | 11.83% | 10.29% | -6.77% | 13.86% | 0.68% |
Source: Seeking Alpha, 28 Nov 23
While Dycom only has a net income margin of 7.4% in Q3, this is higher than the average of the five companies compared. The relatively high cost of layer fiber optic cabling as well as 5G network architecture are the primary reasons for not achieving a higher net profit margin.
Another strong metric for Dycom compared to peers is its return on equity and assets. Dycom represents the highest return on equity at 23% and highest return on assets at 9.3% compared to peers. Therefore, while the company only has modest net income margins, it has comparatively higher efficiency at producing revenue.
Return on Equity and Assets: Dycom and Major Competitors
DY | ACA | MYRG | MDU | PRIM | MTZ | |
Return on Equity | 23.04% | 13.19% | 15.76% | 16.97% | 11.48% | -1.72% |
Return on Assets | 9.27% | 4.10% | 6.36% | 4.94% | 5.22% | 1.54% |
Source: Seeking Alpha, 28 Nov 23
Capacity for Increasing Market Share
The second key factor driving DY as a buy rating is its capacity for increasing market share and acquisitions. The company is made up of 40 operating companies and has only been increasing in recent years. One notable recent acquisition was Bigham Cable which expands Dycom's capacity to service customers in the Southeast United States.
In comparison to competitors, Dycom has the capital to meet consumer demands. The company has a low debt ratio along with $2.6B in total assets compared to $1.6B in total liabilities. Finally, unlike some of Dycom's competitors like ACA or MDU, it does not offer dividends. Instead, Dycom focuses its profits on reinvestment and growth. This strategy has proven effective as seen in its recent net income growth.
Outlook and Valuation
The third major factor warranting a buy for Dycom is its current value. Despite strong growth and profitability, DY has only seen modest YTD price return compared to peer competitors. At $103.87 at the time of writing this article, DY is 11.2% below its Jul '23 high of $115.53.
Despite Dycom's strong growth and profitability compared to its peers, it currently has a FWD P/E GAAP 34% lower than its sector and lower than the average of competitors analyzed. Additionally, this P/E ratio is 60% below its own 5-year average. DY also has a low FWD price/sale and price/cash flow ratio compared to its sector. Given these favorable valuation metrics, DY is still arguably undervalued. Therefore, one can reasonably expect DY to surpass its all-time high price next year and perhaps reach $120. Such a price return would represent a 16% upside and be slightly higher than its 10-year CAGR of about 14%.
Forward Looking Valuation Metrics for DY Compared to Sector
P/E GAAP FWD | EV/EBITDA FWD | Price/Sales FWD | Price/Cash Flow FWD | |
DY | 13.37 | 7.76 | 0.70 | 8.40 |
Difference to Sector | -35.16% | -29.62% | -46.71% | -36.60% |
Source: Seeking Alpha, 30 Nov 23
Volatility and Risks to Investors
One of Dycom's strengths, its strong revenue from telecommunications, also represents one of its greatest risks. DY's telecommunications business segment accounts for 90.1% of its revenue, according to its Q3 '23 report. Furthermore, a total of 66.8% of Dycom's revenue in Q3 '23 came from just five major customers: 25.2% from AT&T, Inc., 12.7% from Lumen Technologies, Inc., 11.3% from Comcast Corp., 9.1% from Verizon Communications, Inc., and 8.5% from Frontier Communications Corporation. Therefore, disruption in one or more of these primary customers will likely have a significant impact on Dycom's ability to continue achieving revenue growth.
The second major risk factor to Dycom's operations is adverse weather. Poor weather not only impacts demand for services but slows operations leading to higher-than-expected costs. As a result of these risk factors and other variables, DY has a 60-month beta value of 1.29. This beta is higher than the five major competitors analyzed. Therefore, investors can expect a volatility greater than the market overall for Dycom.
Concluding Summary
Dycom is an industry leader in the telecommunications industry that warrants a buy rating due to its strong growth and profitability. Additionally, the industry is expected to see impressive growth due to both fiber optics systems and 5G infrastructure growth. DY is postured to take advantage of this growth and even increase market share due to its capacity to acquire other companies. While DY has a large concentration of its business tied to five major customers and can be negatively impacted by adverse weather, DY is arguably undervalued. Dycom has a P/E ratio significantly lower than its sector and its own 5-year average. Additional forward metrics such as EV/EBITDA, price/sales, and price/cash flow all indicate positive valuation for Dycom.
For further details see:
Dycom Industries Is Wired For Growth In The Telecommunications Industry