Daktronics: Strong Growth Outlook But Weak Bottom-Line Margins

seekingalpha04-27

Daktronics past financials have shown robust revenue recovery from the impact of COVID-19. Although margins recovered in 2023, they have yet to reach pre-pandemic levels.Looking ahead, the global LED ...

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Although margins recovered in 2023, they have yet to reach pre-pandemic levels.Looking ahead, the global LED ...</p>\n\n<a href=\"https://seekingalpha.com/article/4686796-daktronics-strong-growth-outlook-but-weak-bottom-line-margins\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Daktronics: Strong Growth Outlook But Weak Bottom-Line Margins</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nDaktronics: Strong Growth Outlook But Weak Bottom-Line Margins\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-04-27 03:08 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4686796-daktronics-strong-growth-outlook-but-weak-bottom-line-margins><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Daktronics past financials have shown robust revenue recovery from the impact of COVID-19. Although margins recovered in 2023, they have yet to reach pre-pandemic levels.Looking ahead, the global LED ...</p>\n\n<a href=\"https://seekingalpha.com/article/4686796-daktronics-strong-growth-outlook-but-weak-bottom-line-margins\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4157","symbol_name":"电子设备和仪器","start_time":0,"source_url":"https://seekingalpha.com/article/4686796-daktronics-strong-growth-outlook-but-weak-bottom-line-margins","article_id":"2430432780","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/172288419/image_172288419.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2430432780","pubTimestamp":1714158489,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Daktronics past financials have shown robust revenue recovery from the impact of COVID-19. Although margins recovered in 2023, they have yet to reach pre-pandemic levels.Looking ahead, the global LED ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4157":"电子设备和仪器","BK4568":"美国抗疫概念","BK4139":"生物科技","BK4588":"碎股","DAKT":"Daktronics","BNTX":"BioNTech SE","BK4548":"巴美列捷福持仓","BK4551":"寇图资本持仓","BK4535":"淡马锡持仓","BK4585":"ETF&股票定投概念"},"translate_title":"达科：强劲的增长前景，但微弱的底线利润","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"DAKT":1,"BNTX":0.83},"content_text":"Daktronics past financials have shown robust revenue recovery from the impact of COVID-19. Although margins recovered in 2023, they have yet to reach pre-pandemic levels.Looking ahead, the global LED video display market is expected to grow to $20.8 billion by 2027. This positive outlook is expected to bolster Daktronics' growth.Despite the positive growth drivers, Daktronics' net income margin and free cash flow are low, posing a risk in challenging economic conditions.   itsjustluck/E+ via Getty Images Synopsis Daktronics (NASDAQ:DAKT) specializes in the design and manufacture of electronic scoreboards, programmable display systems, and large-screen video displays. DAKT’s historical financials have shown a robust recovery from the impact of the COVID-19 pandemic. Additionally, its margins in 2023 also recovered, but it has yet to reach back to 2021’s level. For the third quarter, net sales decreased because of a tough comparison period. On a brighter note, 3Q24’s margins expanded year-over-year. Looking ahead, the global LED video display market is expected to grow to $20.8 billion by 2027. This growth is supported by robust growth in the Asia-Pacific, Americas, Europe, and Middle East and Africa regions. The expected robust growth in Americas will support DAKT’s growth as most of its revenue is from that region. Despite all these positive growth drivers, DAKT’s net income margin and free cash flow are low. They do not provide a sufficient buffer or safety net for DAKT if it were to hit another period of challenging economic conditions, in my view. On this note, the upside potential does not provide a sufficient margin of safety for the risk it carries. Therefore, I am recommending a hold rating for DAKT. Historical Financial Analysis   Author's Chart Over the last four years, DAKT’s net sales have been growing and recovering from the dip in 2021. In 2021, net sales fell to $482 million due to the impact of COVID-19. In 2022, its net sales started to increase, and it reached $611 million, which is higher than the 2020 level. Net sales growth was attributed to the recovery from the COVID-19 pandemic. In 2023, revenue continued to grow, and it reported net sales of $754 million. The robust growth for 2023 was driven by backlog order fulfillment and continued order booking. In addition, strong market demand for DAKT’s product in 2023, combined with increased pricing, also contributed to 2023’s growth.   Author's Chart Moving onto its profitability margins, they have been volatile over the years. For 2022, gross profit margin contracted to 19.1% from 2021’s 25.02%. The contraction was caused by pandemic-induced supply chain constraints and high inflation, which caused COGS to increase. As a result of the lower gross profit margin, 2022’s operating income margin was affected as well, and it contracted to just 0.66% vs. 2021’s 3.55%. Net income margin also contracted to just 0.10% for 2022 vs. 2021’s 2.27%. However, in 2023, margins started to recover. Its gross profit margin grew to 20.07%, driven by strategic decisions to increase price and increased productivity. Its operating income margin grew to 2.84%, and it was attributed to a higher gross profit margin, lower general and administrative expenses, and lower product design and development expenses. Its net income margin expanded to 0.90% in 2023. However, I do note that its bottom-line margins are low, and it does not provide sufficient buffer before turning negative. Third Quarter Earnings Analysis For the third quarter of 2024, net sales decreased 7.9% year-over-year to $170.3 million. The reason behind the decrease was due to a tough comparison period. For the same quarter last year, strong net sales were driven by high backlog fulfillment caused by the recovery from pandemic-induced supply chain constraints and labor shortages. In addition, the third quarter of the year is usually a period of lower volume for DAKT due to the seasonality effect. For 3Q24, both commercial and international net sales were down 33.4% and 28.6% year-over-year, respectively, as a result of seasonality. However, it was partially offset by order fulfillments in the remaining three segments [live events, high school park and recreation, and transportation]. For the nine months of 2024, DAKT’s product and service orders grew 6.6%, driven by strong 3Q24’s orders growth of 29.4%. Demand in the North America region has strengthened, but it was partially offset by weakness in the international region, which is illustrated in the chart below. Apart from strong orders, the order backlog has also improved. For 3Q24, the total backlog was $328.3 million vs. the previous period’s $429.1 million. This shows that the backlog has been reduced, and it was attributed to improvements in manufacturing lead times.   Author's Chart Moving onto profitability margins, its gross profit margin expanded to 24.5% vs. the previous period’s 22.55%. The margin improvement is attributed to strategic pricing and higher sales generation per dollar of cost. DAKT’s operating income margin grew to 4.7% from 3.8%, driven by a decrease in operating expenses. Operating expense for the quarter fell 2.6% due to the previous period incurring a one-time goodwill impairment charge. Adjusted net income for the quarter expanded from 2.01% to 2.58% after excluding the $6.3 million change in fair value of convertible notes.   Author's Chart Outlook of the LED Video Display Market   Investor Relations Over the last three years, the global LED video display market has been consistently growing. In 2021, it was reported at $7.6 billion. In 2022, the market grew 11.8% to $8.5 billion. For 2023, it increased to $9.3 billion, which represents a year-over-year growth of 9.4%. During this period, the global LED video display market’s growth rate was averaging about 10% per annum, and this robust growth momentum is anticipated to continue for the next four years. For 2027, the LED market is projected to reach $20.8 billion.   Daktronics In 2021, DAKT released the NPN-6400. This new LED product offers one of the tightest pixel pitch available on the market. At its lowest, it is able to offer a pixel pitch of 0.7 millimeters [mm], but it is also available in 0.9mm, 1.2mm, and 1.5mm. The NPN-6400 is ideal for closing viewing scenarios such as in retail spaces, offices, and airports. Looking at the worldwide LED video display market by type chart above, narrow pixel pitch [NPP] LED currently forms the largest share, followed by standard LED. The ultra-narrow pixel pitch [UNPP] LED is new to the market, and hence, it has a small market share. By 2027, it is clear that NPP LED’s dominance in the LED market is expected to grow. Additionally, UNPP LED’s market share is expected to grow significantly by 2027 as compared to 2023.   Investor Relations The strong global LED video display market growth outlook will be supported by growth in the Asia Pacific, Americas, Europe, and the Middle East and Africa [EMEA] regions. Over the last three years, these three regions have shown strong and consistent growth. In the chart, it is clear that Asia Pacific forms the largest share of LED video display sales. Following next is the Americas, and last is EMEA. From 2021 to 2023, all three regions have been growing annually, contributing to the total global LED display sales. By 2027, global LED sales, excluding monochrome and tricolor, are expected to reach $20.4 billion. As a comparison, 2023 reported global sales of $8.7 billion. Leading Market share in the North America   Author's Chart Looking at DAKT’s sales segment, it is broken down into five parts, as listed in the sales segment chart. Its commercial, live events, high school park and recreation, and transportation segments include sales in the US and Canada. Combined, the North America segment accounts for 91% of total net sales.   Investor Relations Based on DAKT, its market share in the North America market is 45.9%, with the remaining 54.1% belonging to competitors. This data essentially tells us that DAKT owns almost half of North America’s market. This is good news, as almost 91% of its revenue derives from the US and Canada. With such a high percentage of market share and revenue coming from North America, the growth outlook of this market will dictate the strength of DAKT’s outlook. According to management, they are expecting the Americas region to grow at a compound annual growth rate of 23.5%, with the US leading it for the next four years. Relative Valuation Model Over the last five years, DAKT’s free cash flow has been volatile and keeps hovering between positive and negative. With such uncertain and low free cash flow, a discounted cash flow valuation model is not feasible. Therefore, I will be employing relative valuation instead. I will be comparing DAKT with its peers in terms of growth outlook and profitability margins. Referring to my model, it is clear that DAKT significantly outperformed its peers in terms of forward growth outlook. DAKT has a forward revenue growth rate of 17.48% vs. peers’ median of 0.96%. Furthermore, DAKT also outperformed its peers in terms of profitability margins. Firstly, DAKT’s EBITDA margin of 12.90% is higher than peers’ median of 9.88%. DAKT’s net income margin of 6.59% is also higher than peers’ median of 5.59%. Currently, DAKT’s P/E ratio is trading at 8.29x, which is significantly lower than peers’ median of 15.37x. Given that DAKT outperformed its peers in both forward growth outlook and profitability margins, DAKT should be trading at its peers’ P/E ratio at the minimum. However, I will be applying a small discount to the peers’ median P/E ratio so that I remain conservative in my valuation of DAKT. For 2025, the market estimates DAKT’s revenue to be $815 million, while 2025 EPS is estimated to reach $0.84 per share. Given my discussion on the outlook of the LED video display market and DAKT’s commanding market share in North America, the market estimates are reasonable. By applying my conservative target P/E for 2025 of 13x to DAKT’s 2025 EPS estimate, my 2025 target price is $10.92, which represents 14% upside potential.   Author's Relative Valuation Model Risk In its latest 3Q24, DAKT reported margin expansion, but it was modest. If we look at its nine-month ended January 2024 financial result, it reported an adjusted net income of $45.97 million. With net sales of $602.2 million, this gives us an adjusted net income margin of approximately 7%, an improvement when compared to 2023. For the upcoming quarters, if DAKT is able to maintain this momentum and continues to improve its margins, the market might revise its valuation for DAKT upwards.   10Q Conclusion In conclusion, DAKT’s past four years of revenue have demonstrated a strong recovery from the impact of COVID-19. Although margins took a hit in 2022, they recovered in 2023. For 3Q24, its margins continued to show year-over-year expansion, which is a welcome sign. Looking ahead, the global LED video display market is expected to grow for the next four years, driven by growth in the Asia Pacific, Americas, Europe, and EMEA regions.  However, its net margins are still in low single-digit percentages, which is cause for concern as it does not provide sufficient buffer in the event of an economic downturn. Therefore, the upside potential does not provide a sufficient margin of safety given this risk. On this basis, I am recommending a hold rating for DAKT.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430432780"}