In the past few months the S&P 500 has oscillated from over 2100 to the mid 1800s and now back to 2035. This volatility has given long-term investors an opportunity to bargain hunt among high-quality names with strong earnings growth. A great example of a strong company that is on sale for opportunistic investors is Dycom Industries (NYSE: DY). The company's stock has fallen from a peak of $87/share to currently trade at $63.22/share. This decline in share price comes despite forecasts for healthy earnings per share growth. A weak overall market is dragging down the common stock of Dycom Industries. Enterprising investors should use this as an opportunity to buy in at $63.22/share.
Organic Revenue Growth
Dycom's main business is to provide specialty-contracting services to telecommunications providers and business has been booming. The company's five largest customers in this arena are AT&T (NYSE:T), CenturyLink (NYSE:CTL), Comcast (NASDAQ:CMCSA), Verizon (NYSE:VZ) and a customer who has chosen to remain anonymous. Most everyone believes this customer is Alphabet (NYSE: GOOG) (NASDAQ:GOOGL). According to Dycom's Q2 2016 conference call these top five customers made up 68.9% of revenue growing at 42.5% organically. Once again in Q2 2016 Dycom experienced impressive revenue growth among this core group of customers. Specifically, AT&T grew 28.6% year-over-year to 125.3M in revenue. Centurylink contributed 83.4M to revenue but did not experience growth. Comcast grew 29.8% to contribute 75.3M in revenue. Verizon grew a mind blowing 137.9% to contribute 66.3M to the top line. Revenue from the anonymous customer was 32.5M. Managing these relationships is an enormous opportunity for Dycom and also an enormous risk. AT&T exemplifies this risk/reward tradeoff. In 2016 AT&T plans to have capital expenditures of 22B according to page 30 of their 2015 10k. This makes the money spent on Dycom's services look like a drop in the bucket and should ensure Dycom investors that there is plenty of room to grow this relationship. The problem with being dependent on huge customers like AT&T for ~70% of revenue is that things can go bad quickly. Strategic decisions by a couple telecom executives to go with a competitor or do this work themselves could cause this growth story to fall apart fast. History indicates Dycom will continue to grow these relationships as companies invest in fiber networks, but investors should be aware of the very real risks.
Impressive Services Backlog
The company's rock solid relationship with the biggest telecom heavyweights has resulted in more work than they can handle. As a result Dycom tracks and reports an important financial metric for stockholders simply called Backlog. Backlog at the end of Q1 2016 stood at $3.967B, up from $3.68B at the end of Q4 2015. Backlog at the end of Q2 2016 jumped all the way up to $5.06B. Investors should keep a close eye on backlog to see how demand for Dycom services is trending. A steady increase in backlog is a positive for the business. If the company starts to quickly work through its backlog it could be a concerning sign that new work orders have stalled out. It also could mean that Dycom has expanded its workforce and can complete more projects at once. Investors should monitor conference call Q&As for questions about the company's backlog each quarter. Generally backlog seems to be trending up, which is an encouraging sign for the future results of the business.
Quality Financial Performance and Jubilant Management Enthusiasm
Let's take a look at the impressive raw numbers. In Q2 2016 revenue increased 26.8% over Q2 2015 to $559.5M. This revenue growth was driven by "a broad increase in demand from several key customers as we deployed 1-gigabit wireline networks and grew core market share." The company did a solid job of converting this impressive revenue growth to earnings growth. Specifically year-over-year adjusted diluted earnings per share doubled from $0.27/share to $0.54/share. This marks the best second quarter earnings performance ever for the company and the fifth best adjusted earnings number in company history. Management sees many more performances like this in the future. In the most recent conference call management commented the current investment cycle "has produced opportunities across a broad array of our existing customers which in aggregate are without precedent to the industry in our experience." These strong results emboldened the board of directors to increase the buyback authorization from $50M to $100M. This is a moderate and sustainable buyback given that the company has $309M of liquidity available and produces hundreds of millions of dollars of operating cash flow annually. Financial performance has been strong and the gist of management comments is that we can expect financial performance to continue to strengthen.
Recent Poor Stock Performance
Despite incredibly healthy financial performance, a strong relationship with crucial large customers, and a robust services backlog, Dycom's stock has nosedived. The stock peaked at almost $90/share then fell all the way to just under $50/share before recovering to sit at $63.22/share as of this writing. Though the stock's descent seems to have ended there is no way to represent this as a story with strong technical momentum. Investors who require a clear uptrend before committing their capital should look elsewhere for opportunities. That being said, it seems illogical to think the stock can continue to double quarterly earnings and not experience a renewed interest in the shares. It also is worth noting that the descent followed a slight earnings miss and coincided with a large drop in the broader market. The investment thesis for Dycom is fundamental not technical as the share performance has been admittedly poor.
Dycom Industries is uniquely set to benefit from a countrywide push to increase internet speeds. The company has good relationships with the big internet providers, which it has leveraged to achieve impressive financial growth and robust demand for services. The stock has suffered over the past few months but the daring investor should consider purchasing shares at this price to benefit from universal demand for faster and faster internet speeds by the consumer.
Citation: All numbers and quotes are from the Dycom Q1 and Q2 2016 conference call transcripts
Disclosure: I am/we are long DY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.