STIFEL: DY ($91.94, Buy) - F4Q16: Adj EPS of $1.64 vs. Stifel $1.60. Solid 1Q17 Guidance. Lower Goodman Rev. Guidance Reflective of Aggressive Pruning?
F4Q16: Adj EPS of $1.64 vs. Stifel $1.60. Solid 1Q17 Guidance. Lower Goodman Rev. Guidance Reflective of Aggressive Pruning?
Dycom reported F4Q16 adjusted EPS of $1.64 vs our estimate of $1.60 and consensus of $1.56. Results were solid, with sales (ex estimated Goodman revs) 1% ahead of our estimate, adjusted operating income 1% ahead of our estimate, and EBITDA in line. F1Q17 guidance is for adjusted EPS of $1.55 to $1.70 versus our $1.62 estimate and consensus of $1.63. Dycom meaningfully lowered its expectation for F2017 Goodman revenue contributions (a 36.5% reduction at the midpoint), however, EBITDA margins are now expected to approximate DY consolidated levels in 2Q17 versus F2018 previously. Our read is that DY likely pruned low-margin work more aggressively than it initially anticipated. Shares are down in the after market, which we think reflects high expectations for the quarter, concern over the Goodman revision, and the 7.9% recovery in DY the past week vs 0.4% for the S&P 500. We believe that strong backlog numbers (reported tomorrow) and bullish management commentary could swing shares to a slightly positive move.
Organic revenue growth remained strong in the quarter at 20% y/y. Revenues of $789.2 million exceeded our estimate by 1.2%, and the consensus by 2.3%. In total, sales were up 36.4% y/y and 18.7% q/q.
EBITDA was in-line with our forecast, beat consensus. Adjusted EBITDA of $126.0 million, or a 16.0% EBITDA margin, was in line with our estimate of $125.7 million, or 16.1% of sales and beat consensus of $121 million.
It appears that FCF was positive in the quarter. We calculate adjusted DSO at ~79 days, versus 90 in the prior year.
We think that the expectation for significantly lower Goodman revenues in 2017 but higher margins sooner reflects more aggressive pruning of low margin work than initially anticipated. We are looking for clarification on the call. Dycom now expects Goodman revenues to approximate $100 million in 2017 versus $150-$165 million previously. However, EBITDA margins are now expected to approximate DY consolidated levels in 2Q17 versus F2018 previously.
The key question is where can Goodman revenues and margins go in 2018? We were previously estimating that Goodman could contribute roughly $0.25 to EPS in 2018 ($165- $170 million in revenue, ~$23-$25 million in EBITDA or a 14%-14.5% EBITDA margin). At $115 million in revenues and a 15.0%-15.5% EBITDA margin, we estimate EBITDA would approximate $17 - $18 million and EPS accretion $0.17 - $0.18 p/s.
DY provided F1Q17 guidance for revenue of $780 - $810 million (18%-21% y/y growth) and adjusted EPS of $1.55 - $1.70. This compares to our estimate of $1.62 and consensus of $1.63. Firm F1Q17 guidance was moderately ahead of initial "first look" guidance, which suggested mid-to-high teens revenue growth, and suggested EPS (by our estimate) of $1.56 – $1.67.
Target Price Methodology/Risks
Our $102 target price is based on 50/50 weighting of 18.5x our 2017 EPS estimate and 9x EV to EBITDA. Our target multiples reflect the assumption that current multiples will at minimum hold as we move deeper into the cycle next year.
Risks:
1) General business risk: Dycom is dependent on the spending levels of its customer base.
2) Customer concentration remains relatively high at Dycom.
3) Competitive markets: Dycom operates in certain fragmented, competitive markets. This can lead to competitive pricing pressures. There are relatively few barriers to entry in the telecommunications contracting industry. Dycom also faces competition from in-house service organizations at some of its customers.
4) Weather risk: Extreme weather poses a risk to Dycom's productivity.