Dycom Industries, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

A leading provider of specialty contracting services throughout the United States, focusing primarily on telecom infrastructure and a growing presence in other utility sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Dycom Industries (DY) operates within the infrastructure services industry, specializing in the provision of engineering, construction, maintenance, and installation services for telecommunications providers, as well as a growing presence in other utilities industries. The company doesn’t manufacture a product, but a service, and they act as an infrastructure partner to communication and utility providers.

  • Services: DY’s services include program management, planning, engineering and design, installation, maintenance, and upgrades of telecommunications infrastructure, as well as other specialty services for related industries. They work with aerial, underground, and inside-plant systems and they provide fiber splicing and testing as well. They also have a growing practice in power grid solutions. They work with other infrastructure and industrial companies by providing a mix of maintenance, installation, and specialty services for the energy industry.
  • Customers: Dycom works with major telecommunications providers, cable companies, and increasingly with energy and utility companies across the United States. Their customers include major players like AT&T, Verizon, and Lumen. The company’s customer relationships are long-term, as repeat business is a commonality in this industry, and this is one of the key factors in their revenue.
  • Geographic Focus: DY is primarily focused on the U.S. market, which is characterized by a substantial demand for upgrades and expansions of communications infrastructure, as well as ongoing operations and maintenance work.

Industry Trends:

  • 5G and Fiber Expansion: The need for 5G mobile and fiber broadband is driving significant infrastructure upgrades, creating major demand for telecom services. This represents an area of high demand for network infrastructure construction, upgrades, and maintenance, creating consistent growth for companies involved in this sector. The company is also well positioned to benefit from the U.S government’s initiatives around universal broadband access. The company has indicated that the Infrastructure Investment and Jobs Act of 2021 will be a growth tailwind for the foreseeable future.
  • Infrastructure Upgrades: The telecommunications sector is undergoing a major overhaul to upgrade its networks to new technologies such as fiber optics and 5G. These upgrades require significant upfront investment and also ongoing maintenance and upgrades.
  • Shift to Fiber and Wireless: There is a clear trend toward investments in fiber and wireless networks as a result of technology evolution. Companies with expertise in these areas such as DY are best positioned to capture the demand in these sectors.
  • Infrastructure Aging: A large proportion of infrastructure is ageing, with ongoing maintenance and upgrades required, and thus creating a steady demand for business in this market.

Competitive Landscape:

  • Highly Fragmented Industry: The industry in which DY operates is highly fragmented with a large number of regional and national players, and while this may appear to be a weakness, this can be an opportunity for DY to acquire smaller firms and consolidate a bigger business.
  • Competition: The level of competition is driven by factors such as pricing, ability to deploy services efficiently, and specialized skills. DY has shown an impressive ability in these sectors.
  • Key Competitors: Some of their key competitors include Quanta Services, MasTec, and various smaller private or publicly traded regional or national players, however, DY is one of the few companies with a national footprint.

What Makes Dycom Different?

  • National Scale: Dycom has built itself a national footprint, allowing it to capture economies of scale and to serve major providers on a large basis.
  • Long-Term Relationships: The company has longstanding relationships with its major customers, which provides recurring revenue as those customers routinely need updates and maintenance of their infrastructure.
  • Specialized Expertise: DY offers expertise in niche areas, such as fiber-optic splicing, for which there is a limited supply of qualified workers.

Financial Analysis:

  • Revenue Trends: DY has consistently grown revenue year after year, benefiting from increased demand. However, there has been a recent deceleration in growth rate, and revenue from certain clients has dropped as a result of completion of some major long-term projects.

Management expects that as clients plan to add capacity, the company will see revenue growth accelerate again, which means the slowdown will not be a permanent one.

  • Margins: Gross margins have held in the 12%-14% range for several years, and operating margins in the 6%-8% range. Management indicated they intend to bring margins up in the coming years through reducing costs.
  • Operating Profits: There is a significant difference between operating profit and net profit. The company pays out an elevated level of interest expense due to its leveraged capital structure, and there are also elevated level of amortization and depreciation.
  • Cash Flow: Cash from operations is quite high and positive, which means they are cash positive, which is a great thing to see. Cash from operations consistently exceeds the net income generated by the company.
  • Capital Structure: DY uses substantial amounts of debt to operate its business. This has also driven growth, but the company also is heavily impacted by interest rates and changes to their debt schedule.
  • Profitability: The ROE of the company has been generally between 15%-25%, which is a decent level of return on equity.

Moat Analysis:

  • Moat Rating: 2/5
    • DY does possess a narrow moat mainly due to its scale and high switching costs that are involved with the nature of its operations. The fact that they have a national reach that many competitors don’t helps too. However, the business model is easily replicated and new entrants into the industry could replicate DY. In addition, it appears that competition can also eat away at profits, and it appears that there is some pressure on prices as well. As a result, their moat is less than a wide moat.

Risks to the Moat and Business Resilience:

  • Concentration of Revenues: The company relies on a handful of large customers for most of their revenue. Losing business with one of their major clients, or consolidation of the telecommunication industry, can have a significant impact on the business. In its latest earnings call, the company acknowledged that the telecommunications industry may see some slowdown in the near-term, which will affect revenue from some clients.
  • Technological Disruption: Although the sector is heavily dependent on technology to operate, if new disruptive technologies disrupt existing operations, it would impact DY’s competitiveness, since their specialty is maintaining the existing infrastructure.
  • Cost of Capital: The company’s business is highly capital-intensive, requiring constant investment into new projects. As a result, interest rate hikes would directly impact the operations of the business.
  • Labor Costs and Supply: The business is heavily dependent on having a steady supply of labor, including having specialized labor. Shortages of labor can negatively affect the company.
  • Economic Downturn: As DY’s customers continue to reduce spending, this might reduce demand for DY’s services, thus affecting revenues and profitability.
  • Regulation: Companies in the telecommunications, power, and utility sectors are typically heavily regulated, and new regulations could negatively affect DY’s operations and profit outlook. This is especially the case if those regulations cause project delays.
  • Acquisition Risk: A portion of DY’s growth over the years has come from acquiring other companies. Integrations can cause disruptions, and if the cost of acquisitions is too high, it can cause a negative impact.

Understandability Rating: 3/5

The business model for DY is fairly straightforward. The company provides a service to customers and collects a fee. The primary way they generate revenue is through long term contracts. They are able to grow their business through market expansion, acquisitions, and pricing. The complex part comes when analyzing the financials and the level of debt that they operate with and how that debt influences the business. It is difficult to make assumptions around future revenues because much of it comes from external forces such as new technologies being introduced and governmental projects being undertaken.

Balance Sheet Health: 4/5

DY has a very solid balance sheet, but their high debt leverage pulls down the rating somewhat.

  • Liquidity: They have plenty of cash and cash equivalents on hand, and their current liabilities are well under control for the foreseeable future. They appear to be very liquid.
  • Debt: Total debt was around $1.8 Billion at the end of the last fiscal year. The debt to equity ratio was more than 1, which is a fairly high number for a business with less volatility in the market. Also, about $1.2 Billion was in short-term borrowings which may be an area of risk if interest rates rise substantially. But that said, their interest coverage ratio is good. The debt burden increases in inflationary environments.
  • Solvency: The company is solvent, meaning that they have the ability to meet long term financial obligations. Though a large portion of the assets are listed as “net property, plant, and equipment” and goodwill, their value remains reasonably high.