Take Advantage of Conversion to Fiber Optic with Dycom

09/23/2015 9:00 am EST

Focus: STOCKS

Matt McCall

Founder and President, Penn Financial Group

For telecom companies to keep up with demand and new technologies they must convert from copper wires to fiber optic lines, so Matt McCall, of Penn Financial Group, points to this leader on the infrastructure side since it is one of the only pure play stocks to take advantage of the conversion.

When searching for stocks that are considered long-term buying opportunities the key to success is getting behind a story that has staying power. One trend that is in the early stages and is here to stay is the demand for more data, voice, and video at a faster rate. For the telecom companies to keep up with the demand and the new technologies they must convert from the century-old copper wires to fiber optic lines.

The leader in the infrastructure side of the business is Dycom Industries (DY). The telecom infrastructure company will provide the telecom service providers with everything from digging up the old copper lines, to installing new fiber optic lines, to maintaining the lines and related equipment. Customers of Dycom include the who’s who of telecom: Comcast (CMCSA), Verizon (VZ), and AT&T (T) to name a few.

Technically, the stock has been one of the best performers in the S&P 600 Small-Cap Index over the last six months, gaining 60%. Only two stocks that have not been taken over have been able to outperform Dycom. In the last week the stock has pulled back slightly from an all-time high but continues to hold up much better than its peer and the overall market.

The fundamentals behind the company warrant the big gain over the last six months and suggest even higher prices in the years ahead. The $2.57 billion company currently trades with a PEG ratio of 0.79, implying the stock is undervalued versus the sector and the US stock market. Earnings doubled from $1.16 in fiscal year 2014 to $2.41 in fiscal year 2015 and they are expected to increase by another 38% next year to $3.32. Revenue, which has been difficult for many companies to continue growing, is expected to increase from $1.81 billion in 2014 to $2.7 by 2017, an increase of nearly 50%.

The company has the ability to create organic growth as evidenced by the past and the future revenue expectations. But, they also have been buying smaller peers to help boost both the top and bottom line. The company spent a little of $70 million on two privately help competitors in the sector and most analysts expect more consolidation in the future as the bigger names look to expand through acquisitions.

What makes Dycom such an interesting stock idea is that it is one of the only pure play stocks to take advantage of the conversion to fiber optic lines. Not only is the company the leader in the niche sector, it also generates the majority of its revenue from the upgrade process. The numbers indicate about 15% of the company’s revenue come from working with wireless networks, which is an entirely different business model.

Matt McCall, Founder and President, Penn Financial Group

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