Investor Essentials Daily

5G sparks revolution for this key player

Dycom Industries (DY)
November 22, 2023

In today’s rapidly evolving telecommunications sector, the focus is shifting towards ramping up investments in 5G technology.

This strategic move is particularly crucial in the U.S., where they promise to reshape the industry’s landscape.

Despite these progressive efforts, it appears that rating agencies may not fully recognize its significance, especially in the realm of contracting services.

There’s a tendency to hold onto traditional assessment methods, possibly overlooking the potential long-term benefits of these investments.

Amid this backdrop, Dycom (DY) emerges as a notable example. By prioritizing its resources towards investing in 5G, Dycom is positioning itself for future success.

However, this forward-thinking approach might not be getting the recognition it deserves from rating agencies, who seem to maintain a cautious, if not negative, outlook on the sector.

Today, we will examine the credit risk of Dycom using Uniform Accounting to determine if rating agencies are providing an accurate analysis of the company.

We can use Uniform Accounting to put the company’s real profitability up against its obligations and decide for ourselves the true risk of this business.

Also below, a detailed Uniform Accounting tearsheet of the company.

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The U.S. is currently witnessing a significant surge in 5G investments, a trend that’s reshaping the telecommunications industry.

This surge is driven by the need for faster and more reliable internet connections to support an ever-growing digital economy.

The deployment of 5G networks is not just about speed; it’s about creating an infrastructure that can support the next generation of digital services and innovations, from smart cities to advanced telemedicine.

As this 5G wave sweeps across the nation, it’s creating a ripple effect of opportunities for companies involved in the telecommunications sector.

One such company reaping the benefits of this trend is Dycom (DY). The company is known for its specialty contracting services, and primarily caters to the telecommunications industry.

Its role is pivotal in laying down the physical groundwork essential for the expansion of 5G networks.

Dycom’s expertise lies in constructing and maintaining the complex infrastructure required for high-speed communication networks. This includes everything from installing fiber-optic cables to upgrading existing telecommunication facilities.

The company’s services are crucial in bridging the gap between the technological advancements in 5G and their practical, on-the-ground implementation.

Interestingly, its largest customers include AT&T (T) and Lumen Technologies (LUMN).

Both companies are actively expanding their fiber locations, signaling an increased demand for Dycom’s services.

This expansion is not just a short-term surge; it’s indicative of a long-term trend toward enhanced connectivity and network resilience.

As these major players extend their fiber networks, the demand for Dycom’s specialized services is expected to grow correspondingly.

This growth trajectory positions the company favorably both in the short and long term.

With its specialized focus on telecommunications infrastructure, the company is well-equipped to handle the increasing demands of a 5G-driven market.

The ongoing expansion of fiber networks by its major clients further cements Dycom’s role as a key contributor to the nationwide rollout of 5G technology.

However, it seems like the rating agencies didn’t get the memo.

S&P gives Dycom an “BB” rating. This rating suggests a risk of default around 11% over the next five years. It also places the company in the risky high-yield basket.

Given its solid financial position and the potential gains from the 5G market, this should indicate that Dycom should have a safer credit rating.

We can figure out if there is a real risk for this company by leveraging the Credit Cash Flow Prime (“CCFP”) to understand how the company’s obligations match against its cash and cash flows.

In the chart below, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand available at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

The CCFP chart shows that Dycom’s cash flows are more than enough to serve all its obligations going forward.

The chart suggests that the company has a strong financial footing and should be able to meet its obligations without difficulty going forward in the next five years.

It only has one debt maturity in 2026 which doesn’t seem concerning when taking into account its robust cash flows.

Additionally, the company stands to increase its profits through its engagements in 5G projects.

Considering these, we believe that Dycom has a minimal risk of default, contrary to the rating agencies’ views.

Thus, we are giving an “IG3+” rating to the company. This rating ensures it is in the safer investment-grade basket and implies a risk of default of around just 1%.

It is our goal to bring forward the real creditworthiness of companies, built on the back of better Uniform Accounting.

To see Credit Cash Flow Prime ratings for thousands of companies, click here to learn more about the various subscription options now available for the full Valens Database.

SUMMARY and Dycom Industries (DY:USA) Tearsheet

As the Uniform Accounting tearsheet for Dycom Industries (DY:USA) highlights, the Uniform P/E trades at 15.4x, which is below the global corporate average of 18.4x, and its historical P/E of 30.4x.

Low P/Es require low EPS growth to sustain them. In the case of Dycom, the company has recently shown a 545% Uniform EPS growth.

Wall Street analysts provide stock and valuation recommendations, that in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Dycom’s Wall Street analyst-driven forecast is for a 63% EPS growth and a 7% EPS growth in 2024 and 2025, respectively.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Dycom’s $84 stock price. These are often referred to as market-embedded expectations.

Furthermore, the company’s earning power in 2023 was in line with the long-run corporate average. Moreover, cash flows and cash on hand are 2x its total obligations—including debt maturities and capex maintenance. The company also has an intrinsic credit risk that is 230bps above the risk-free rate.

Overall, this signals a moderate credit risk.

Lastly, Dycom’s Uniform earnings growth is above its peer averages, but is trading below its average peer valuations.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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