Dycom Industries Inc. DY broke its earnings beat streak of eight quarters, as it missed estimates in first-quarter fiscal 2019. The company continues to face multiple headwinds, which have affected its performance over the past few months. We anticipate high operating expenses, poor contribution from acquired businesses as well as pronounced seasonal fluctuations to thwart growth in the upcoming quarters as well. Mirroring these headwinds, the company also lowered its guidance for fiscal 2019.
It’s not surprising that the stock has also put up a dismal show in recent times. In the past six months, Dycom has lost 14% compared with the industry’s decline of 6.4%. Let’s delve deeper to find the major factors curbing this Zacks Rank #5 (Strong Sell) company’s growth and why it might be prudent to avoid the stock at the moment.
Factors to Consider
Dycom’s margins are prone to suffer due to timing volatility, customer spending modulations and an adverse mix of work activities. Moreover, massive promotional expenditures and cut-throat pricing competition are plaguing the U.S. telecommunications industry. Also, severe spectrum crunch coupled with gradual Smartphone and tablet adoption is compelling wireless operators to seek other options for raising revenues. In the meantime, the highly dynamic telecommunication industry continues to experience rapid technological, structural and competitive changes. This, in turn, might reduce the service requirements from Dycom and adversely impact its financial performance.
Furthermore, Dycom’s business is likely to be significantly impacted by inclement weather conditions as a major part of its work is done outdoors. Therefore, extended periods of adverse weather might hurt the company’s earnings during the winter, especially in the second and third quarters of fiscal 2019. Earlier, pronounced seasonal impact from Dycom’s acquired businesses and the costs related to initiations of large customer programs have hurt its bottom line significantly and might continue in the upcoming quarters as well.
Notably, Dycom derives a significant portion of its revenues from master service agreements and long-term contracts, which may be cancelled at the discretion of customers. For instance, the company’s first-quarter fiscal 2019 contract revenues came in at $731.4 million, down 7% year over year. The decline was primarily due to moderation in spending by one of the company’s important customer as well as revenue declines from certain other customers. Also, revenues from its top five customers declined 8.8% organically, while the same from all other customers decreased 14.2% organically. This apart, the highly competitive in nature of the specialty services contract industry in which Dycom operates is concerning.
Considering the above-mentioned risks that the company faces, we believe it would be apt for investors to avoid the stock for now.
Stocks to Consider
Some better-ranked stocks from the same space are MasTec, Inc. MTZ, KBR, Inc. KBR and Jacobs Engineering Group Inc. JEC. While MasTec sports a Zacks Rank #1 (Strong Buy), KBR and Jacobs Engineering carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
MasTec surpassed estimates in the trailing four quarters, with an average positive earnings surprise of 38.3%.
KBR exceeded estimates thrice in the trailing four quarters, with an average positive earnings surprise of 14.1%.
Jacobs Engineering outpaced estimates in the preceding four quarters, with an average earnings surprise of 12.3%.
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