Daktronics (DAKT) is the world's largest supplier of large-screen video displays, electronic scoreboards, LED text and graphics displays and related control systems, notes Faris Sleem, a leading specialist in low-priced stocks and editor of The Bowser Report.
The company excels in the control of display systems including those that require integration of multiple complex displays showing real-time information, graphics, animation and video. The company has inked multiple major contracts recently, including the Los Angeles Clippers, Netflix, and Real Madrid.
Daktronics sales rely on the seasonality of sports and construction resulting in lackluster results for the third and fourth quarters. The company still managed to report year-over-year revenue growth of 39% for the fourth quarter following record annual orders. One of the largest orders was the new LA Clippers Intuit Dome Halo Board, the largest double-sided display in an arena setting.
Supply chain disruptions, freight costs and higher material costs lowered profit margins. The company reported a net loss of $1.1 million for the fourth quarter, and its gross profit margin dipped to 19% for 2022. These issues are temporary, and we believe this makes DAKT more appealing in comparison to its competitors due to its strong financials.
Daktronics has a healthy balance sheet and a history of positive cash flows.The most appealing aspect of investing in DAKT is its valuation. Its price/sales (P/S) ratio of 0.22 is extremely low and can result in fast value creation if profit margins increase. Outstanding shares have barely increased in recent years, causing a steeper undervaluation and revenue per share of $13.71.
Even with a temporary setback to its profitability, DAKT has a price/book (P/B) ratio of 0.70. The stock is clearly undervalued and has the revenue and competitive edge to create more value in the future.
The company’s healthy balance sheet and investments in automation will help maintain its strong financials. Management is improving efficiency and redesigning product lines. As long as profit margins do not dip any further, the company is in a great position to generate value.
Market volatility and industry seasonality could cause larger price fluctuations for DAKT. The stock price has been unable to break its downward trend and EPS growth is temporarily slowing. These factors add risk and may necessitate more patience when buying the stock.
The stock has already piqued the interest of institutions, who account for 55% of the outstanding shares and have accumulated heavily in the last two quarters. Acadian Asset Management and Vanguard made sizable purchases totaling 803,926 shares.
Overall, Daktronics is an overlooked value stock with high revenue and multiple competitive advantages. While investors can buy the stock at its current market value, we consider $2.75 to be the ideal long-term entry point.
