On Friday, B.Riley shifted its stance on Dycom Industries (NYSE:DY), upgrading the stock from Neutral to Buy and significantly increasing the shares price target to $172 from the previous $101. The firm has revised its estimates upward and foresees a reversal in the trend of softening organic growth that Dycom has experienced over the past six quarters.
The improvement is expected due to several factors, including anticipated capital expenditure (capex) increases by two of Dycom's largest clients in the second half of 2024, a projected rise in wireless spending over the intermediate to long term, and the distribution of Broadband Equity, Access, and Deployment (BEAD) funding awards around the middle to late 2024.
The analyst from B.Riley believes that as Dycom's organic growth picks up, the company will likely see continued profit margin expansion. This expansion is attributed to a favorable shift in customer and project mix, coupled with labor productivity leverage.
The analyst has conservatively estimated a 12.3% EBITDA margin for fiscal year 2025, which is modest compared to the 14.6% margin in fiscal year 2016, suggesting there could be further upside potential in the coming years.
Dycom Industries, as a specialized telecom contractor, is recognized for its considerable scale and longstanding relationships with all major telecom carriers and cable Multiple System Operators (MSOs). The firm's analysis indicates that Dycom is in a strong position to benefit from federal funding aimed at expanding rural broadband, as well as from increased carrier capital expenditures on infrastructure expansion and upgrades.
In terms of valuation, B.Riley pointed out that Dycom's stock is currently trading at 8 times its fiscal year 2025 estimated enterprise value to EBITDA (EV/EBITDA) ratio. This is below its 10-year historical average range of 10.8x to 6.7x and considerably lower than its peer Quanta Service (PWR), which trades at nearly 18 times. B.Riley suggests that there is potential for Dycom's multiple to expand to 12 times EBITDA, which could propel the share price to over $210.
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