KeyBanc Downgrades Dycom After Guidance Cut, Awaits Revenue Re-Acceleration

Telecom contractor Dycom Industries, Inc. DY released a concerning earnings pre-announcement and downward revision to its guidance on Monday. 

The Analyst

KeyBanc Capital Markets' Tahira Afzal downgraded Dycom Industries from Overweight to Sector Weight.

The Thesis

Dycom Industries revised both its second quarter and full fiscal 2019 guidance lower, but the company continues to tout a positive longer-term outlook, Afzal said in the downgrade note. (See the analyst's track record here.) 

Dycom's closest peers continue to signal strength in their activity levels in addition to "fairly consistent" positive supply chain commentary on recent conference calls, the analyst said. 

The company's backlog is up by around 31 percent year-over-year, but the 0.9 times 12-month book-to-bill ratio reflects limited visibility of any revenue ramp in the coming quarters, Afzal said. This may be due to a slower than previously expected upstart on nascent customer programs, but also implies investors can turn bullish again on the stock when there is evidence of revenue re-acceleration, she said. 

The ongoing margin deterioration is consistent with prior woes, including a slower-than-expected program ramp, which drives underabsorption, the analyst said. '

The company's peers managed to maintain their margins in-line with expectations, and "more comfort" is needed on Dycom's margin trajectory given the severity of its guidance cut, according to KeyBanc. 

Price Action

Shares of Dycom Industries were trading up 5.24 percent to $71.66 at the time of publication Tuesday. 

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