The case for Dycom

Dycom Analysis

I came across this company last month and it piqued my interest. He is my attempt to convince you it is a good investment. Please feel free to rip it to shreds for the benefit of the board.

Company web page:
Includes lines to recent press releases.

About Dycom Industries, Inc.
Dycom is a leading provider of specialty contracting services throughout the United States and in Canada. These services include program management, engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities, including telecommunications providers, and other construction and maintenance services to electric and gas utilities.

That is, they lay a lot of cable in the ground and install equipment for carriers. As I mentioned in a previous link, they are at the heart of the big fiber build out as cable providers try to catch up the Verizon’s big lead. (summary of good IBD article that brought this company to my attention. Very good read).

Oct 2015 Investor Presentation, a good read, no, a must read…

Stock Charts.
I like some of the data shown along with this chart…

Saul Analysis:
MF has its “20 questions”. Here are Saul’s from the KB.

I look for companies that are easy to follow
Fail: To my knowledge Dycom is not an MF recommendation, so not as easy to follow as Saul would like.

Don’t need to understand the technology/industry
NA: Well, you could if you want: they put fiber in the ground – and other related services.

I want a company with rapidly growing earnings
Some IBD ratings from late Sept (my previous post)
IBD “ratings”
Composite = 99th percentile
EPS = 99
RS = 99
Industry group rank #10
Accumulation = A
5 year profit growth rate = 46%

Here is some data from Finviz (I know, must get it from the Q reports) Expecting 24% growth.

P/E	19.36	EPS (ttm)	1.67
Forward P/E	11.28	EPS next Y	2.87
PEG	0.97	EPS next Q	0.66
P/S	1.34	EPS this Y	24.30%
P/B	3.14	EPS next Y	26.21%
P/C	12.95	EPS next 5Y	20.00%

EPS Q/Q	53.50%

Our spreadsheet here:……
says 1YPEG is 0.29 (see snippet below)

Trailing Earnings Last Year	Trailing Earnings This Year
Q-8	Q-7	Q-6	Q-5	Q-4	Q-3	Q-2	Q-1
$0.54 	($0.09)	$0.23 	$0.48 	$0.59 	$0.27 	$0.58 	$0.97 

TTME last year	$1.16 
TTME this year	$2.41 
TTME growth YoY	108%
1YPEG	0.29

I look for recurring revenue
Fail: No real recurring revenue here, once the Fiber is in the ground that part of the job is done. The do have some recurring management services, but no razor blade model.

I look for substantial insider ownership
Fail? Insider ownership 9.4% (Finviz) (What does Saul consider substantial?)

I look for a company with rapidly growing revenue. By rapidly I’m looking for usually at least 25% per year
Sales Q/Q of 49.2% (Finviz)

Get the information yourself. Not yahoo, etc
I got it from “our” spreadsheet, so I trust that.

I look for a company that has a long way to grow long runway. One that ideally can grow almost forever
Fail: This cannot “grow forever” like a shoe company that can expand worldwide. It is not a potential 10 year holding. But it is riding a wave of fiber build-out that is likely to continue for years as competitors try to catch up to Verizon. The big wave is 1Gig to the home, 4G-LTE cellular and Gov subsidized rural high bandwidth access and these make the company feel earnings are much more predictable going forward.

Not too big to grow/double/triple
Pass: Market cap about $2.5B revenues about $2B, so fairly small. They have been an acquirer of small companies similar to themselves, so a bit of a consolidator.

I want a company that does something special,
Fail: digging holes is not very special.

I want management to be interested in making a profit.
Pass: They don’t seem to be wrapped up in “compassionate capitalism”, or whatever they do at The Container Store. They have been acquisitive, so they seem intent on growing the company. See page 13 of Oct Investors Presentation.

I avoid mining and drilling and natural resources stocks, which tend to go in cycles from boom to bust

I don’t usually buy restaurant chains. They seem inherently limited

Press releases
9/15 – Dycom Industries Announces Closing of $485 Million Convertible Senior Notes
$485 million aggregate principal amount of convertible senior notes due 2021…
convertible into shares of Dycom’s common stock, cash or a combination thereof, at Dycom’s option, at an initial conversion rate of 10.3211 shares of Dycom’s common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of approximately
$96.89 per share of Dycom’s common stock), representing an initial conversion premium of approximately 30.0% above the closing price of $74.53 per share of Dycom’s common stock on September 9, 2015. The notes pay interest semiannually at an annual rate of 0.75%…

Dycom received net proceeds from the offering of approximately $471.7 million. Concurrently, Dycom used approximately $60 million of the net proceeds (representing a portion of the $75 million authorized) to repurchase shares of its common stock from the initial purchasers of the notes in privately negotiated transactions at a price per share of $74.53.

So dilution in the future offset by some reduction in shares now
…Dycom intends to use approximately $296.6 million of the net proceeds to fund the redemption of its 7.125% senior subordinated notes due 2021…
The remainder of the net proceeds from the offering, approximately $74 million, is available for general corporate purposes.
So this will greatly cut its debt servicing fees at the cost of future dilution. But I am not sure I would still be an owner 5-6 years from now.
The October Investor Presentation says this: purchased call overlay to protect share dilution up to a stock price of $130.43 per share

8/25 - Dycom Industries, Inc. Announces Stock Repurchase Program
authorized an additional $50 million to repurchase shares … to be made over the next eighteen (18) …The Company has substantially completed its previous share repurchase authorization of $40 million. As of August 24, 2015, the Company had approximately 33.2 million shares of common stock outstanding, excluding the dilutive effect of stock options and unvested restricted stock.

shares	price	market cap	buyback	percent
33,200,000	77.77	 $ 2,581,964,000.00 	 $  50,000,000.00 	1.94%

Barron’s: 30 Stocks to Consider Heading into Earnings…

Why you should dig Dycom’s growth prospects:…

MF: says the margins are fine……

MF: cash flow…
it turned 1.9% of its revenue into FCF. That doesn’t sound so great. FCF is less than net income. Ideally, we’d like to see the opposite…
With questionable cash flows amounting to only 3.2% of operating cash flow, Dycom Industries’s cash flows look clean.

Zacks Rank #1 (Strong Buy)
CAPS rating – 5Stars

Last earnings were 8/25 and beat big. Next Nov 5.


Pudding head,

That is excellent, I don’t know about the company, but the check list and rough sourcing is outstanding.

This goes into my marked for reply folder to be read a few times. That check list ought to be another tab on the spreadsheet.


but the check list and rough sourcing is outstanding

Thanks, it was a good exercise. I hope everyone realizes the check list is taken directly from Saul’s KB and I just filled in the answers for this company. I think I will post it as a “blank” template ready to go in case anyone wants to copy/paste it for use.


Hi PuddinHead, Looks like a good analysis. I’ll try to read through it carefully later or tomorrow. As far as:

I look for substantial insider ownership
Fail? Insider ownership 9.4% (Finviz) (What does Saul consider substantial?)

That’s a definite pass! 9.4% of $2.5 billion gives them almost a $250 million stake. That’s definitely enough to keep them interested!


1 Like

Nice write up. I am wondering if we are on the down hill slide on fiber deployment at this time. I am not familiar with Dycom but I do know Mastec. In my area we have been slowing down on fiber deployment because all of the easy places have been done. Running fiber across poles to customers houses, apartment buildings, big commercial buildings. Even most of the new housing tracks have been completed. Now it is starting to be more selective. I am not saying this is happening all over the country, just in my area. So I would watch this very closely because even Verizon did not build out fiber to every customer in their serving area. Some people will stay on the copper and never see fiber.


1 Like

I am wondering if we are on the down hill slide on fiber deployment at this time

Andy, no, it does not seem so. First go read their recent investors presentation. It has lots of quotes from their big customers about their needs (and confidence) to build out (which I highly recommend reading)

Presentation snippets:
Encouraged that industry participants remain committed to multi-year capital spending
initiatives which in most cases are meaningfully accelerating and expanding in scope

Slide 6 shows expected growth in zettabytes of IP traffic.

Slide 7 customer spending modulations have decreased (more stable/certain)

Slide 7 Increasingly likely calendar 2015 will be seen as the foundational year for a
massive investment cycle in wireline networks

Slide 10: Gov subsidies - key driver “Connect America Fund” (i.e. give a farmer broadband) $1.6B annually.

Slide 11: 4G LTE build out. Think we are stopping there?…

Gartner: total projected telecom equip spending expected to increase 9.5% from $168.8B in 2014 to $184.8B in 2017. Thompson Reuters expects Dycom’s sales to increase 49% during that period to $2.7B up from $1.81B in 2014.

One could argue this is all built in at this point. I guess you you buy this stock you think it is not. I am inclined to think it is not and think I will take a tryout position. Unless someone convinces me I am wrong before Monday :wink: