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Dycom Is In Pole Position For Fiber Optic Growth

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D ycom Industries ( DY ) is bigger than any telecom field-service company and poised to take the lion's share of sales in what's shaping up to be a supercycle in the telecommunications market.

The specialty contractor provides engineering, construction, maintenance and installation services in the U.S. and Canada to virtually all of the large telecommunications companies. Among its five largest customers are top wireless carrierVerizon Communications ( VZ ), telephone giantAT&T ( T )and No. 1 cable service providerComcast ( CMCSA ).

Copper wires that provided a reliable telephone network for more than 130 years in this country, and now also carry Internet and cable traffic, are being supplanted by faster fiber optic lines capable of carrying more voice, data and video.

Dig It, Install It, Maintain It

Dycom's bread and butter is what's called wireline network services. Its customers are replacing copper lines with fiber optic lines, and they call on Dycom to do the digging, installation and maintenance of lines and equipment.

Dycom installs some gear for wireless networks, but analysts estimate that it's less than 15% of Dycom's revenue.

Market tracker Gartner says that as the massive upgrade to fiber optics rolls out, total projected telecommunications equipment and services spending in the U.S. will rise 9.5% from $168.8 billion in 2014 to $184.8 billion in 2017.

Thomson Reuters forecasts Dycom's annual revenue to climb 49% during that period to $2.7 billion, up from $1.81 billion in 2014.

Real Lines Get Sexy Again

"Wireline has been languishing for years" as people focused on wireless networks such as cell towers to relay signals for smartphones and tablets, Gartner analyst Akshay Sharma told IBD.

But with traditional copper networks to homes and businesses getting maxed out due to the sheer volume of voice, data and video, companies have to go to fiber optics, Sharma said.

"Wireless has always looked sexy. Now wireline on its own is starting to look sexy again, thanks to fiber optics. As we go to 4K TVs, people will want to consume streamed content over the Net, along withAmazon ( AMZN ) Prime orNetflix (NFLX)," Sharma said.

"That's 50 megabits per second now. With three, four or more channels to a house, they will shortly need 200 or 300 megabits per second."

Roman Friedrich, a partner in PriceWaterhouseCoopers' European telecom analysis and consulting firm, Strategy&, agrees that copper line replacement will drive demand for services from companies like Dycom.

"We are really convinced that ultimately we will see two main fixed (line) technologies, cable and fiber," Friedrich said. "The demand is huge, especially in the consumer segment."

Dycom isn't a household name because it's an umbrella for 44 separate regional companies that serve all 50 states and parts of Canada.

Its stock price reflects its recent growth. During the three years from mid-December 2011 to mid-December 2014, its stock rose 53%. In the nine months since then, it's climbed 131%, hitting a series of all-time highs along the way.

Dycom disclosed fiscal fourth-quarter earnings on Aug. 25. Earnings per share rose 102% vs. the same quarter a year earlier to 97 cents, beating estimates by 14 cents a share. It was the third quarter in a row that the company topped Wall Street's earnings target.

Dycom CEO Steven Nielsen told analysts on the Q4 earnings call: "It is increasingly likely that in retrospect, calendar year 2015 will be clearly seen as the foundational year for a massive investment cycle in wireline networks, reminiscent of and perhaps more meaningful than one that occurred in the 1990s," when fiber optic networks first took off.

Telecoms Playing Catch-Up

Nielsen was referring to Verizon's 10-year conversion to fiber optics, starting in the late 1990s. Verizon was alone among big telecom firms in adopting the newer technology. Rivals such as AT&T andSprint (S) weren't ready at the time to commit the time and resources to a full fiber optic network.

Today, "Sprint is doing a massive upgrade. And AT&T, with its GigaPower initiative, is looking at fiber optics all the way," Gartner's Sharma said.

After Dycom's Aug. 25 earning report, BB&T Capital Markets raised its price target on Dycom stock to 85 from 80, with a buy rating.

"Dycom is by far the biggest provider of construction services to telecom companies," BB&T analyst and Senior Vice President Adam Thalhimer said in an interview.

"Its top customers, AT&T, (regional phone and broadband service provider)CenturyLink (CTL) and others have talked about increasing their offered speeds to 1 gigabit per second and above. Dycom is a play on this underlying trend."

Today, most U.S. high-speed Internet users have connections up to 50 megabytes, 1/20th the speed of a 1-gigabit (1,000-megabit) line. AT&T U-verse high-speed Internet, for example, offers on its website three high-speed options for home customers, the highest being "speeds up to 45 Mbps," for $59.

Organic Growth And Buyouts

Last quarter, Dycom made two small purchases for a total of $22.1 million. On Aug. 7, it bought turnkey utility services contractor TelCom Construction for about $48.6 million cash. TelCom is based in Clearwater, Minn., and has offices in Phoenix and in cities in Missouri, Tennessee and Texas.

Those were just the most recent in a long string of acquisitions by which Dycom has consolidated the telecom services industry.

"It was a great strategy," Thalhimer said. "Dycom hunkered down in the wireline construction market that everyone wanted to get out of. Meanwhile, Dycom said, 'We'll just consolidate it.'"

Enough Growth For Others

Dycom isn't the only player in town -- just the biggest.

Among its rivals is privately held Goodman Networks, which lists AT&T-owned DirecTV and energy companyEnbridge (ENB) among its customers. Based in Plano, Texas, Goodman employs more than 3,600 nationwide and generated $1.13 billion in pro forma revenue in 2013 while losing $45.4 million, according to documents filed with the Securities and Exchange Commission. It had planned to go public but withdrew its registration statement on Aug. 25.

Another competitor isMasTec (MTZ), a diversified building, installation and service provider for oil and gas companies, telecom companies and others. For the quarter that ended June 30, MasTec reported $1.066 billion revenue, with communications customers accounting for $469.9 million of it.

On the earnings call, Dycom CEO Nielsen said that he expects more.

"I think our success as well as others' in the industry will attract competition, but we've seen that before, and we're not concerned. As long as we do a good job for our customers, there will be plenty of opportunities."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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