- Daktronics, the preeminent manufacturer of large video screens, just reported its 4th quarter and gave a misleading head-fake that spooked its retail investors. The stock is down 18%.
- After adjustments for one-time events, the 4th quarter was very close to expectations.
- Orders have been growing 15%, 14% and 21%, year-over-year, for the last three quarters, respectively.
- Just before the quarter was reported, the Board increased its dividend by 11% and the stock now yields 3.4%.
Daktronics (NASDAQ:DAKT) has fallen 18% to $11.82 (as of June 6th) following its fourth quarter results which were reported on May 28th. For those of you that don't know Daktronics, it is the preeminent large video screen manufacturer in the world. It has a dominant share of the large video and score-board markets for sporting event complexes. Last fiscal year, it won six of the seven major contracts awarded for large video display systems. Currently, DAKT is installing the largest video displays ever made for the Jacksonville Jaguars (60 feet x 362 feet, with one in each end-zone).
The headlines for the quarter read: "DAKT reports 4Q14 of $0.04 vs. $0.14 expected."
Needless to say, if you didn't listen to the conference call or didn't read the conference call transcript, it looks pretty dismal. The facts are that DAKT did report $0.04 after a one-time charge of $0.05 from a reversal of tax credits taken prior to 2011. In addition, the horrendous weather during its fourth quarter (February through April) delayed revenue recognition by $5 to $6 million (per DAKT's CFO, Sheila Anderson). Ms. Anderson stated specifically that "there was $5-$6 million of standard order products that did not ship" due to bad weather. By my calculations this non-shipment of "standard order product" caused another shortfall of $0.03 in EPS. This weather-caused event did hurt 4Q14; however, it will help 1Q15 by an equal amount. By the way, the three sell-side analysts that follow this stock (Needham, Griffin and Sidoti) have had their average estimate for 1Q15 drop by $0.01; whereas, it is clear the weather push-out of sales for 4Q14 will become a windfall for 1Q15. Given the fact that sales are not keeping up with DAKT's growing backlog, I also believe there was a weather push-out of non-standard order product in the fourth quarter that was not quantified by management during the conference call. Is there room for an upside surprise come 1Q15? I think so!
So add up the one-time adjustments. EPS reported = $0.04; plus, Tax Credit Reversal = $0.05; plus, Bad Weather Impact = $0.03; equals, Adjusted EPS of $0.12. Not a big miss!
When you have a company like DAKT whose stock is 60% controlled by retail investors (per the last Proxy Statement) and you have some tough headlines on a thinly traded stock, bad things happen to the price of the stock. The damage has now been done and the opportunity now presents itself.
During the conference call there was some lamenting by one of the analysts about the relatively slow pace of historic sales growth. To be more specific, sales growth slowed the last two fiscal years to just 5.9% in fiscal 2013 and only 6.5% in fiscal 2014. What a comparison of year-over-year sales growth fails to capture is that the growth in orders has taken on a new life and sales have not kept pace with the growth rate in orders. Because DAKT's orders are seasonal, growth in orders must be compared year-over-year (not sequentially). For the last three quarters, orders have grown 15%, 14% and 21% year-over-year, respectively. Because sales growth did not keep up with order growth the backlog grew 15% in fiscal 2013 and increased just over 21% in fiscal 2014. As a result of the growing backlog, sales growth in fiscal 2015 will be significantly higher than 6% in order to meet DAKT's growing book of orders. DAKT's growth in orders reveals that it is not a staid or stagnate company. To the contrary, it is clear to me worldwide demand for large screen displays is accelerating. DAKT has recently had a growth spurt in capital spending and hiring so it can keep up with its recent growth in orders.
Just before the fourth quarter was announced, the Board of Directors increased DAKT's dividend by 11%. Does the Board know how solidly the future is shaping up for DAKT? The stock now yields 3.4%. Not bad.