DAKT - Daktronics Strong Q4 2023 Financials Mask Lingering Concerns For The Future

2023-07-18 14:22:42 ET

Summary

• Daktronics, Inc. reported strong Q4 2023 financials despite operational challenges, with record-breaking sales of $209.9 million and an annual figure of $754.2 million.
• However, the company's long-term declining trend in share value and dividends, rising operational expenses, and potential macroeconomic risks raise future concerns.
• I believe it's best to maintain the current position until signs of sustained growth and value generation become evident.

Thesis

In this article, I delve into Daktronics, Inc.'s ( DAKT ) financial performance, one of the key players in the electronic display systems industry. Despite facing significant operational hurdles, the company reported strong financials for Q4 2023, showing resilience and shrewd management. However, I argue that a declining trend in share value (over the mid/long-term) and dividends, coupled with potential macroeconomic risks and significant operational expenses, raises concerns for the future.

Company Overview

Daktronics, Inc. is a player in the electronic display systems industry with a wide array of offerings. Their products, primarily designed for sporting, commercial, and transportation applications, are not confined to the US but are prominent in international markets as well. They manage their operations through five distinct segments: Commercial, Live Events, High School Park and Recreation, Transportation, and International. They have a diverse product range that includes but is not limited to, video displays and walls, scoreboards, timing systems, and message displays.

Daktronics, Inc. Bullish Q4 2023 Earnings Highlights

Daktronics, wrapped up an exceptional fiscal year 2023 , posting positive numbers despite a number of operational roadblocks such as part shortages, interrupted work schedules, and spiraling inflation. Through astute handling of the high-demand market, shrewd pricing tactics, and resilient supply chain processes, the firm charted its course out of turbulent waters.

Turning to the financials, Daktronics reported record-breaking sales, hitting a high note of $209.9 million in the fourth quarter and a remarkable $754.2 million annually, equating to a substantial 29.4% and 23.4% growth respectively from the previous year. This strong sales performance was mainly driven by the effective conversion of the company's substantial order backlog, coupled with a stable supply chain and heightened manufacturing capacity.

Meanwhile, the company witnessed an uptick in gross profit as a percentage of net sales, reaching 24.8% in Q4 and 20.1% for the year, attributable to strategic pricing decisions and a reduction in supply chain hiccups. While the inflationary environment and high labor and material costs posed challenges, Daktronics successfully bolstered its profitability.

On the flip side, the firm did register an increase in operating expenses, amounting to $33.9 million in Q4 and $130 million for the year; however, the silver lining is that these expenses represented a smaller percentage of sales, contributing to an operating income surge to $18.3 million (8.7% of sales) for Q4 and $21.3 million for the year.

On the balance sheet, Daktronics shifted gears from cash investments to cash generation, improving its liquidity and paving the way for sustainable, profitable growth. The firm effectively minimized inventory through ramped-up production and slashed purchases, while also enhancing cash inflows through the timely collection of deposits and billings.

During Q4, Daktronics generated $24.5 million and $15 million from operations. Looking ahead, the firm anticipates that inventory levels will normalize as supply chain disruptions wane and the substantial order backlog is gradually met. As of April 29, 2023, cash, restricted cash, and marketable securities totaled $25.2 million and the company secured $17.8 million in borrowings to fund working capital and capital asset additions, while maintaining a working capital ratio of 1.6 to 1.

For FY24, Daktronics is eyeing revenue and profitability growth, backed by a solid backlog of $101 million and planned investment of less than $90 million in capital assets, concentrating on manufacturing and technological upgrades.

On the conference call, CEO Reece Kurtenbach noted that he anticipates a surge in the global use of audio-visual communication systems, spanning both traditional and innovative applications. Essentially, the firm is betting on business growth across various units and the harnessing of emerging technologies like Narrow Pixel Pitch .

Performance

Over the course of nearly a decade (see data below), Daktronics' share price has plummeted from $13.82 to $6.42. That's a nosedive of more than half its value with an annualized ROR sitting at -8.00% sans dividends only sharpening the sting.

The declining dividend payouts and negative dividend growth are another red flag where we see that from 2015 to 2020, the dividend per share has shrunk from $0.400 to $0.200, while the dividend growth rate has shrunk at an average of -9.70% over 6 years.

Comparing Daktronics' performance to that of the broader market represented by the S&P 500 Index , the contrast is stark. While Daktronics' share value and dividend returns have been diminishing, the S&P has shown growth in both respects, with an annualized ROR of 9.93% and a compound growth of 11.11%.

Valuation

From a valuation standpoint in the short term (see chart below), the company has a blended price-to-earnings (P/E) ratio of 24.25x. Considering the normal P/E ratio is 147.38x, Daktronics is significantly undervalued from a historical perspective. This discrepancy could be interpreted in two ways: one could see this as a buying opportunity given the possibility of a future re-rating towards the mean P/E.

However, it could also imply a lack of market confidence in the company's ability to maintain its previous earnings trajectory. One of the most impressive data points for Daktronics is the adjusted operating earnings growth rate of 34.48%. If this growth rate can be sustained, it would make a compelling case for investment.

Risks & Headwinds

Firstly, the pervasiveness of inflationary forces in the wider economy has not spared Daktronics, manifesting as heightened material component costs, labor rates, and other input expenses. It's quite notable that these pressures partially negated the improvements in gross profit the company had achieved. To put this in perspective, the rising tide of inflation had an offsetting effect on their robust margins, acting as a speed bump on their road to stronger profitability.

Secondly, the uptick in operating expenses I noted earlier to $130 million from $112.7 million year-over-year raises a yellow flag. Are we witnessing an efficiency slump or is this surge a strategic maneuver involving increased investments in growth strategies?

Moreover, the effective income tax rate for the fiscal year sits at a steep 48.7%. This is primarily attributed to valuation allowances for impairments, foreign losses, and provisions to return adjustments, as well as the mix of tax rates across different income locations. If not adeptly managed, this higher tax burden could significantly erode future profits, ultimately impacting Daktronics' bottom line.

Finally, on the global front, softer market conditions within the company's international business unit add a dose of uncertainty. The effects of macroeconomic and geopolitical dynamics can be capricious, and the continued negative impact on sales into the coming year could have significant implications on the company's global footprint.

Final Takeaway

I would rate Daktronics a "Hold." Despite impressive recent financial performance with strong sales growth and increased profitability, the company has shown a long-term declining trend in share value and dividends. Moreover, rising operating expenses, significant tax burdens, and potential macroeconomic and geopolitical risks in their international markets suggest cautious optimism. While Daktronics appears undervalued and has promising growth plans for the future, the company's performance will largely hinge on successful technological advancements and its ability to navigate inflationary pressures. Therefore, it might be prudent to maintain the current position until more concrete signs of sustained growth and value generation become evident.

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