Daktronics: Spotlight on Advertising

In today's market, the advertising industry is adapting to new business models and broadening its offerings. Traditional advertising agencies are accustomed to mass media advertising. Digital advertising represents a new paradigm as advertising is customized for each consumer. Though mass advertising will not disappear, the trend will be to consumer-centric advertising.

We see the emergence of new advertising models driven by the growth in online advertising revenues. Online advertising involves many different formats including, but not limited to, search, games, online directories and other permission-based models.

The biggest question for today is what effect the global financial crisis will have on advertising expenditures. We have already seen advertising budget cuts for 2008 and 2009.

There are not many players in this sector; we reckon about twenty or so if you eliminate over-the-counter stocks. Of these twenty, only several have market caps of $1.0 billion or more. Even fewer companies have solid balance sheets; they appear to be highly leveraged.

We would focus our efforts on Daktronics (DAKT). Daktronics has a market cap of about $340 million. The company reported earnings of $0.01 for the quarter ending 05/02/09 and $0.65 for the year. Daktronics reports $36.5 million in cash and $10.5 million in long term debt. We think Daktronics is a buy up to $12.82.

Disclosure: No position

Comments

[Longwinded:]

DAKT is a fine company and they make excellent billboards, but the picture has changed in at least three ways in the last year, all of which bode ill; (1) advertising is way down and the primary drivers of local advertising, which is what the electronic boards are best used for are autos, retail, and restaurants, each of which is dead in the water; (2) costs to operate electronic boards are likely to increase faster as boards go to 4- and 5-color, than operating efficiency from improved LEDs, and (3) Lamar, the primary customer for digital LED boards, has way too much debt and was over optimistic regarding cash flow generation from digital boards. At the end of the day, the worst may be over for DAKT, but the case going forward just isn't very compelling as long as businesses that drive local advertising on a "call-to-action" basis are in such bad shape.

Aug 03 05:51 PM