Has Daktronics Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Daktronics (Nasdaq: DAKT  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Daktronics.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 2.5% Fail
  1-Year Revenue Growth > 12% 10.8% Fail
Margins Gross Margin > 35% 23.2% Fail
  Net Margin > 15% 1.7% Fail
Balance Sheet Debt to Equity < 50% 0.8% Pass
  Current Ratio > 1.3 2.10 Pass
Opportunities Return on Equity > 15% 4.3% Fail
Valuation Normalized P/E < 20 37.36 Fail
Dividends Current Yield > 2% 3.6%* Pass
  5-Year Dividend Growth > 10% 26.3%* Pass
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes. *Excluding special dividend.

Since we looked at Daktronics last year, the company's score has stayed the same. A big boost in its dividend offset slowing revenue growth over the past year, but a drop of around 40% in the share price has investors concerned about the company's future.

Daktronics has had to deal with a tough environment for a long time. The company is best known for its digital scoreboards at sports arenas, but you're far more likely to see Daktronic products when you're driving on a major thoroughfare and pass by one of its digital billboards.

Late last year, the advertising industry seemed to be rebounding, and that's helped Daktronics. Although Lamar Advertising (Nasdaq: LAMR  ) and Clear Channel Outdoor (NYSE: CCO  ) have both had their struggles, their reports from late last year showed significant growth in their respective advertising ventures. With Daktronics having sold 10 digital billboards to a company in Las Vegas earlier this year, it needs a solid advertising industry to help support that side of its business.

Unfortunately, Daktronics' most recent earnings report threw a wrench in its recovery. The stock dropped 10% after the company announced an unexpected loss and gave pessimistic guidance for the current quarter as well. Both Daktronics and competitor LSI Industries have missed analyst estimates in their past four quarters, showing just how difficult the industry still is.

One possibility for growth could come in China. There, Focus Media (Nasdaq: FMCN  ) has done well in the digital billboard industry, although the recent slowdown in China has made investors nervous about that stock as well. Still, if Daktronics could tap into that market, there's plenty of potential for higher revenue.

For Daktronics to improve, it needs to beat its competitors while seeing a true turnaround in advertising. Without that, it could be a long time before Daktronics starts to get closer to perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Daktronics isn't the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Daktronics to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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