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Here’s Why Investors Should Steer Clear of Dycom (DY) Now


Dycom Industries, Inc. DY has been witnessing unexpectedly higher costs and extreme weather conditions over the last few quarters. Also, revenue concentration around a few customers is likely to weigh on the company’s overall performance.

Meanwhile, Dycom's shares have lost 56.7% compared with its industry’s decline of 18.9% in the past year.

Let’s delve deeper and try to identify the factors affecting this Zacks Rank #5 (Strong Sell) company’s growth potential.

Dismal Performance: In fiscal 2019, the company’s adjusted earnings of $2.78 per share declined 28.4% yearoveryear. The overall results were negatively impacted by tighter-than-expected margins owing to difficulties in large account. The company’s gross margins contracted 230 basis points (bps), reflecting under-absorption of labor and field costs of large customer programs. Due to the above-mentioned headwinds, Dycom has provided a tepid outlook for first-quarter fiscal 2020. The company anticipates adjusted earnings within 34-56 cents per share, down from the year-ago level of 65 cents. Also, it expects adjusted EBITDA margin to decrease from the year-ago period.

Seasonal Fluctuations& Nature of Business:Dycom’s business is prone to severe weather conditions, as a major portion of its operations is outdoor-based. Importantly, fiscal first-quarter 2020 results are likely to be negatively impactedbycold weather, reduced daylight work hours and the restart of calendar payroll taxes.

Its services are highly cyclical and remain vulnerable to economic downturns. Any fluctuation in the price of oil will directly flare up the cost of business. As majority of contracts do not allow the company to adjust pricing for higher fuel costs during a contract term, Dycom’s inability to accommodate price increases may directly hurt margins.

Higher Costs, Pressurized Margins: Dycom has been experiencing higher costsover the last few quarters. Therefore, its margins are also declining significantly.

In fiscal 2019, the company’s cost of earned revenues (excluding depreciation and
amortization), as a percentage of contract revenues, grew 230 bps. Adjusted EBITDA margin of 10.5% in fiscal 2019 contracted 240 bps from 12.9% in fiscal 2018.

Estimates Trending Downward: Earnings estimates for the first quarter and fiscal 2020 have been downwardly revised by 44.9% and 37.7%, respectively, over the past 30 days, depicting concerns over the company’s bottom-line growth potential.

The Zacks Consensus Estimate for first-quarter fiscal 2019 earnings is pegged at 43 cents per share, reflecting a decline of 33.9% from the prior-year period.

Stocks to Consider

Some better-ranked stocks in the Building Products – Heavy construction industry are Great Lakes Dredge & Dock Corporation GLDD, North American Construction Group Ltd. NOA and EMCOR Group EME. While Great Lakes and North American Construction sport a Zacks Rank #1 (Strong Buy), EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes has an expected earnings growth rate of 170.6% for 2019.

North American Construction expects 2020 earnings growth of 17.2%.

EMCOR is expected to record earnings growth of 6.9% in 2019.

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