DAKT - Daktronics: A Rising Star In The Electronic Display Industry With A 57.5% Potential Upside

2023-09-29 14:26:29 ET

Summary

• Daktronics has experienced a 35% YoY growth in net sales and a shift from a net loss to net income within a year.
• The company maintains a consistent growth path and has a significant order backlog despite supply chain challenges.
• The LED market is projected to grow at a CAGR of 20%, and Daktronics is well-positioned to capture a significant portion of this growth, emphasizing next-gen technologies and diversification.
• Daktronics is undervalued and has a potential upside of 57.5% from current levels, making it an appealing investment opportunity.

Daktronics, Inc. ( DAKT ), a key electronic display systems sector figure, distinguishes itself through its diverse product range and compelling financial trajectory. The company's recent financial data suggests a pivotal moment, with a 35% YoY growth in net sales and a notable shift from a net loss to net income within a year. Despite supply chain challenges, Daktronics maintains a consistent growth path and a significant order backlog. My valuation model suggests that DAKT is undervalued and has a 57.5% potential upside from current levels. When juxtaposed with overarching industry trends and market dynamics, I believe Daktronics emerges as a potentially appealing investment opportunity, particularly given its capable management team.

Business Overview

Daktronics, Inc. is a dominant player in the electronic display systems market. The company specializes in creating a wide array of products, ranging from high school scoreboards to grand video display systems seen in renowned places like Times Square . Their revenue streams are not just limited to the hardware; they also profit from the software and control systems integral to these displays. In the second quarter of 2023, Daktronics reported a net sales growth of approximately 35% year-over-year, reaching $232,531 thousand from the previous year's $171,920 thousand.

This surge, combined with effective cost strategies, flipped their financials from a net loss of $5,326 thousand to a net income of $19,196 thousand within a year. With a substantial backlog of $324 million, the company seems capable of sustaining its revenues. This backlog, coupled with their recent performance, suggests that Daktronics has not only solidified its market position but is also efficiently navigating supply chain challenges. Their ability to promptly address customer needs will be a key differentiator in maintaining market leadership.

Since its founding in 1968, Daktronics Inc. transitioned from electronic voting systems to LED video displays by the mid-1990s. This change demonstrates their capability to adapt to market demands and shift towards consumer-focused applications. Daktronics operates globally, blending local innovation with worldwide market needs. Their product line ranges from scoreboards to advanced video displays, serving industries like sports and transportation. This diversity enhances revenue sources and balances operational risks. Daktronics combines hardware with adaptable software to offer tailored solutions . This customization promotes customer loyalty and increases lifetime value.

Sound Management, Recent Performance, and Promising Developments

Reflecting on the past year, Daktronics faced substantial hurdles, from labor shortages to pandemic-related shutdowns in pivotal regions like Shanghai. Yet, their current performance is exemplary. The remarkable ascent in their gross profit , rising from 15% to 30.6% in just a year, isn't solely attributed to strategic pricing or peak sales. I believe it underscores a company adept at transforming adversities into advantages. Their capability to mitigate operational disruptions, especially when faced with daunting challenges, is a testament to their operational prowess and visionary strategy.

Furthermore, Daktronics' affiliations with esteemed brands like the Green Bay Packers and the New England Patriots aren't merely indicative of their product excellence. I think these partnerships are strategic endeavors to bolster their brand's prestige, serving as powerful endorsements that amplify their market dominance. With the LED market's projected CAGR of 20%, Daktronics is well-equipped, both in product range and technical acumen, to capture a significant portion of this expansion. Their approach transcends market trend capitalization; it's about foresight and adaptability. Their efforts to diversify, targeting a spectrum of markets while remaining vigilant of geopolitical and economic shifts, depict a company that's not just responsive but consistently a step ahead.

Nevertheless, extrapolating from current industry trends and Daktronics' strategic positioning, the future appears promising. The anticipated growth in global audiovisual communication and bullish forecasts for the LED market signifies vast untapped potential. Daktronics, with its comprehensive product portfolio and history of innovation, is well-positioned to capitalize on these opportunities. Their emphasis on next-gen technologies, like narrow pixel pitch and micro LED , indicates a foresight into future industry requirements, ensuring that they're not just participants but pioneers in upcoming market evolutions.

In a world where change is the only constant, the outdoor LED display market is not merely adapting but is thriving. As brands vie for attention and cities grow smarter, the amalgamation of technology and strategic positioning has made these displays the flagbearers of modern outdoor communication. One can anticipate that as technology continues to evolve and urban spaces become more interactive, the role of outdoor LED displays will only become more pronounced, ensuring that this market doesn't just flourish but defines the urban landscape.

Daktronics Inc. influences the electronic display sector through innovation, customer focus, and diversification. As the industry evolves, Daktronics' strategies position it as a market leader and pivotal force for the future of this industry.

Valuation Analysis

During DAKT's latest earnings call , I found it interesting that the company reported a robust 35.3% increase in sales, amounting to $232.5 million, compared to the $171.9 million of the previous fiscal year. This surge was attributed to the company's ability to efficiently fulfill orders, particularly in the Live Events and High School Park and Rec sectors. In my view, the company's adaptability is commendable. A year ago, they grappled with supply chain disruptions, labor shortages, and pandemic-induced shutdowns in Shanghai. Yet, they've managed to not only overcome these challenges but also to thrive. Their gross profit as a percentage of net sales soared to 30.6% in the first quarter of fiscal 2024, up from 15% the previous year. This leap, I believe, is a testament to their strategic pricing, record sales volume, and fewer operational disruptions.

Furthermore, DAKT's EBIT reached a nice $40.2 million, marking a significant recovery from the previous year's $5.5 million loss. DAKT achieved this while maintaining relatively stable operating expenses, indicative of healthy EBIT margins. Additionally, DAKT has a robust liquidity position due to a working capital ratio of 1.9:1, reduced inventory levels, and a balanced financial sheet with cash and securities totaling $54.9 million against a manageable $40 million debt. I believe such financial stability and predictability make DAKT perfect for a straightforward DCF valuation model.

Furthermore, DAKT offers a compelling financial outlook. I project a 3.5% annual revenue growth rate for the company through 2027 due to DAKT's steady revenue CAGR since 2013. For 2023, I've utilized the current year's EBIT margin. I believe this approach provides a realistic assessment, especially considering that beyond 2024 figures, I've used DAKT's historical average EBIT margin of 3.4%. This approach offers a balanced perspective on DAKT's potential financial trajectory, highlighting its consistent performance over the years.

For DAKT's tax rate, I tried to account for its latest effective tax rate increase, but this should be transitory. For 2023, I've relied on DAKT's TTM tax rate while incorporating the average effective tax rate for the following years. This situation is due to the pronounced shift in the effective tax rate, which surged from 15.8% to 31.7%. This leap was largely attributed to the non-taxable fair value adjustment but underscores DAKT's proactive adjustments. Finally, I've formulated a free cash flow forecast based on the company's historical capital expenditure, net operating working capital, and depreciation and amortization relative to revenues. These projected cash flows were discounted at DAKT's CAPM-suggested rate of 10.5%. You can see my valuation model in the table below.

After accounting for the company's cash and debt positions, I estimate DAKT's fair value to be approximately $654.7 million. This valuation suggests a potential upside of 57.5%. This positions the stock as an attractive buy, up to $14.32 per share. Hence, I believe that DAKT offers a compelling investment opportunity.

However, it's crucial to approach this with a balanced perspective by acknowledging potential risks. The electronic display sector is characterized by intense competition and rapid technological advancements. Daktronics' current product offerings could become obsolete if they don't adapt swiftly enough. Also, their ability to navigate supply chain challenges has been commendable, but any prolonged disruptions or a surge in raw material costs could adversely affect profitability. The valuation could become less favorable if these factors lead to a significant margin contraction. Another point of consideration is DAKT's substantial order backlog. While this indicates potential future revenue, there are always inherent execution risks. Moreover, external factors, such as unexpected macroeconomic events, can sometimes disrupt anticipated revenues. Additionally, geopolitical tensions and trade restrictions could challenge global supply chains, potentially impacting DAKT's financial results. So, it's essential to approach DAKT with an understanding of the cyclical nature of its industry and the external factors that could influence its trajectory.

Conclusion

Daktronics, Inc. has consistently demonstrated its ability to innovate and adapt in the electronic display sector. From its historical transition to LED video displays to its recent financial achievements, DAKT has proven its management and business model are up to the challenge. Moreover, the LED market's projected growth, combined with Daktronics' comprehensive product offerings and strategic affiliations, positions the company favorably for future success. From a numbers perspective, my valuation model suggests a potential upside of 57.5% for DAKT, making it a compelling investment prospect. In my view, DAKT's blend of innovation, customer-centricity, and seemingly cheap valuation makes it a good investment candidate in the electronic display industry.

For further details see: