DAKT - Daktronics: Strong Tailwinds Should Keep The Rally Going

2023-07-18 15:20:42 ET

Summary

• Daktronics is capturing strong demand for its specialty large-format high-resolution video displays.
• The company has moved past pandemic disruptions with a renewed focus on high-growth opportunities.
• The stock has gained momentum in recent months and we see room for more upside supported by solid fundamentals.

Daktronics, Inc. ( DAKT ) may not be a household name, but there's a good chance you've been front and center to one of their large format specialty video displays. These are the mega LED monitors found at sporting venues with broader applications for a variety of electronic billboards. The company has an impressive project portfolio that includes displays at New York City's Times Square along with a climbing number of international deals.

The setup here for the stock is a tailwind of strong growth. Daktronics reported its latest quarterly report, capping off a record year of sales driven by high demand for its high-resolution installations. Even with shares of DAKT already doubling over the past year, we are bullish and see room for more upside with a positive long-term outlook.

DAKT Earnings Recap

The company reported its fiscal 2023 Q4 earnings with EPS of $0.47, representing a net income of $21.3 million, reversing a loss of $1.1 million in the same period last year. Revenue of $210 million, climbed by 29% year over year, highlighting the solid operating environment.

The story here was an expanded manufacturing capacity allowing the company to covert a large order backlog. Separately, Daktronics is also benefiting from improved supply chain conditions particularly compared to the first half of 2022.

Efforts to push pricing including through the launch of new value-added products allowed the gross margin to reach 24.8% compared to 18.5% in Q4 2022 which has flowed through a significantly higher operating income.

For the full fiscal year 2023, revenue of $754 million was a record for the company, up 23% y/y, with EPS of $0.15 accelerating from $0.01 in 2022.

By business units, management notes that the strength has been across the board. There is a good operational diversification between "live events" installations that include the mega professional sports stadiums representing approximately 38% of the business, while commercial billboards at 23%, and high-school part and recreation installations at 19% of the business have also been a growth driver.

Management also sees significant opportunities from transportation sector applications through niches like mass transit, airports, and government side customers moving forward with a more "high-tech" approach to informational signage and display systems.

While the company is not offering formal financial guidance for the year ahead, comments from management in the investor conference call projected confidence that the recent trends can continue.

We can also bring up that Daktronics ended the year with $25.2 million in cash and equivalents against $23.2 million in total debt. We view the company's balance sheet as a strong point in the investment profile.

What's Next For DAKT?

Management has laid out several strategies for 2024. The top priority is to grow profitability starting with a push to clear out a $401 million order backlog. This is expected to be achieved over the next few years through a recent focus on efficiency efforts supported by increased manufacturing capacity adding to scale benefits.

There is also an aspect of developing new markets while investing in high-return projects. On this point, while the featured mega video displays may have been reserved only for large stadiums and arenas in the past, an expanding number of use cases represent new opportunities.

Examples of high-priority verticals include youth facilities, high-school stadiums, and over-the-road signage where customers are more willing to invest in high-tech features. Management also believes public sector investments in transportation and infrastructure could add to the company's momentum over the next decade.

Finally, it's worth mentioning that DAKT was recently added to the " Russell 3000 Index " tracked by the iShares Russell 3000 ETF ( IWV ) which we view as a positive given it enhances the company's profile among a wider group of investors. Certainly, the stock price performance in recent months has already raised some eyebrows and we believe that newfound clout is warranted with the stock deserving to be on the radar of more traders.

DAKT Stock Price Forecast

There's a lot to like about Daktronics as a high-quality small-cap. With an enterprise value of just under $300 million and reported EBITDA of $30.3 million in 2023, DAKT is trading at an EV to EBITDA multiple of around 10x. We view this valuation as very attractive for a segment leader, with top-line growth above 20%, capturing several tailwinds for even stronger results going forward.

While the stock hasn't yet received published Wall Street EPS consensus estimates, our modeling is projecting the company can reach earnings of $0.50 in fiscal 2024 as a continuation of the latest quarterly results. With shares approaching the highest level in nearly 2-years, the argument we make is that the setup now is stronger than ever.

By this measure, we rate shares of DAKT as a buy with a year-ahead price target of $9.00 representing a forward P/E of 18x on our 2024 EPS forecast. Monitoring points over the next few quarters include the trends in the gross and operating margin along with the evolution of free cash flow. Announcements of new contract wins and major orders should work to keep momentum in the stock.

In terms of risks, DAKT remains exposed to shifting macro conditions. The possibility of a deterioration of global growth would undermine the operating environment and likely pressure the stock. Weaker-than-expected results through the next few quarters would open the door for a return of volatility and a leg lower in the stock.

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