Taking Stock: Dycom Benefits From Spending Increases

Taking Stock - January 5, 2004
It's about as difficult finding solid growth in the telecom sector as it was getting good seats for The Lord of the Rings over the holidays. While the regional Bells aren't showing much growth, it appears that they and cable companies are once again increasing their capital expenditures. One of the companies benefiting from this uptick is Dycom Industries.

Dycom was established in the late 1960s and has three business segments that provide engineering services to telecommunications and cable companies. The telecom-services segment offers network-design services, mainly by addressing the distance from central offices to customers' premises. Dycom also offers the actual excavation and running of cable, whether copper, coaxial, or fiber optic. This business segment depends heavily on the capital expenditures of the Bells and cable companies, which have cut spending during the last couple of years. Some drivers of this spending are regular maintenance, new commercial and residential construction, and high-speed data and voice over IP. Dycom should continue to benefit from these trends.

Dycom's second line of business is less glamorous: location services for telecoms, cable companies, and utilities. Before you dig up your front yard, the utilities urge you to call them so they can send someone to mark water lines, electric cables, and the like. Dycom performs this service and recently expanded its geographic reach with the acquisition of Utiliquest Holdings. Dycom's telecommunication services will account for more than 70% of total revenue going forward, while location services should contribute slightly more than 20%, with Dycom's third segment-providing electrical and other construction and maintenance for electric utilities-accounting for the rest.

One potential risk for Dycom is its dependence on business from BellSouth and cable company Adelphia. Any change in Bell South's capital-expenditure plans will have an impact on Dycom. Adelphia's situation is rather complicated since the cable company declared bankruptcy. Still, its new management team has told Dycom that it remains committed to increase its spending on cable equipment.

Dycom is finally growing revenue organically-without relying on acquisitions-after a long slump. Organic growth last quarter was up almost 24% from a year ago. Revenue is forecasted to be up nicely from a year earlier in the upcoming quarter. All told, revenue in the second fiscal quarter should reach $170 million to $185 million, up from $137.2 million a year earlier, according to management. Dycom generated 29 cents per share last quarter, up from 9 cents a year ago. Earnings-per-share growth should continue as the company benefits from better utilization rates, leading to EPS of $1.00 in fiscal 2004 and $1.30 in fiscal '05, according to First Call estimates.

The only problem I have is that the company's valuation is becoming somewhat lofty. Dycom is trading at 26 times fiscal '04 EPS estimates and 20 times fiscal '05 estimates. That's not an outrageous valuation, in my opinion, but not as cheap as I'd like. It just may be too much to ask to get good seats for the hottest movie of the season and find cheap stocks with improving fundamentals.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.