The Worst Stock for 2007: Daktronics

Have you ever heard of Daktronics (Nasdaq: DAKT  ) ? Even if you haven't, it's a sure bet that you've seen their products. The company makes those huge Jumbotron screens you see at stadiums across America, as well as an assortment of traffic signs, gas station price announcement screens, and digital advertising systems.

This is and has been an amazing business for the company, no doubt about it. Over the last 10 years, the stock has returned more than 25 times the money invested, trouncing all but a handful of the stocks on the market.

But that rocket ride has simply gotten ahead of itself. Current long-term annual earnings growth estimates average around 29%, a number that seems to assume no meaningful competition for the next five years. There's not much of a fight in the large-format digital screen arena today, but that may change very quickly. Everyone from Hitachi (NYSE: HIT  ) to LG Philips (NYSE: LPL  ) , from Hewlett-Packard (NYSE: HPQ  ) to Dell (Nasdaq: DELL  ) , could divert some of the current overproduction in LCD panels to create large-format screens suitable for the uses in which Daktronics specializes. And if LCDs don't pan out, most of these companies and other behemoths like General Electric (NYSE: GE  ) have LED expertise of their own.

Even if none of that happens, Daktronics' stock trades at 4 times revenues and 62 times earnings, not to mention 10.7 times the company's book value. All of these multiples are beyond any reasonable comparison to the current or prospective competition, and richer than at any point in the history of Daktronics. Of course there are Daktronics boards at Mile High stadium. The valuation is a perfect match for the venue.

This is a small-cap company that gets little attention from Wall Street -- only five analysts follow it. That's the kind of stock that can easily become inefficiently valued, and I think that's the case here. Daktronics may be a great company, but it's a lousy investment right now; today the stock is priced for way more than perfection. I wouldn't touch it with a 50-foot Jumbotron, much less with my own money.

So will Daktronics drop like a rock in 2007? I think the current valuation is simply untenable, and the market will punish it -- hard. In the end, time will tell, but if you agree with my assessment, let us know in our brand-new Motley Fool CAPS investment-intelligence community. Just rate Daktronics "underperform," and fill out your virtual portfolio with a few more of your best -- or worst -- ideas. Make your mark today, and don't forget that you can add your own thoughts and rating to any stock you like. Based on your thoughts, we will declare the worst stock of 2007 early next week.

Want to go back to the beginning of our Worst Stock for 2007 tournament? Right this way.

Daktronics was once a Motley Fool Stock Advisorrecommendation, but Tom Gardner lost faith in its growth prospects and decommissioned the pick. Dell is an active selection of both Stock Advisor andMotley Fool Inside Value.

Fool contributorAnders Bylundholds no position in any of the companies discussed here. You can check outAnders' holdings if you like, and Foolishdisclosureis always a good idea.


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