I have a long and varied history with Daktronics (DAKT -2.69%), an American maker of scoreboards, digital billboards, and other signage products. About 14 years ago, I called Daktronics overvalued and proposed that it would be a terrible stock to own in 2007. The stock crashed hard and stayed down for years, until I thought that the worst was over and opened a Daktronics position of my own in 2015. This was a turnaround story at the time, and not a stock for impatient investors.
Here we are, another five years later, and Daktronics just released another disappointing quarterly report. It is by far the worst-performing stock in my personal investment portfolio.
Is it time to cash in what's left of my Daktronics chips and walk away? Let's take a good, hard look at this troublesome investment.
The latest earnings report
In the second quarter of fiscal year 2021, Daktronics saw sales fall 27% year over year to $127 million. Earnings dropped from $0.16 to $0.08 per share. Analysts were expecting earnings near $0.04 per share on revenues in the neighborhood of $141 million, so the report was a mixed bag from that perspective.
Revenues fell by more than 20% in five of Daktronics' six operating segments, including a 36% decrease in live events equipment, the company's largest division. High school, park, and recreation sales held relatively firm with a 9% sales drop. The segment-by-segment breakdown was similar to the trends seen in the first quarter.
CEO Reece Kurtenbach said the lower sales were expected due to business pressure from the ongoing COVID-19 pandemic. He also noted that his company is focusing on cost controls for now. The effort is real, as shown by several different financial metrics. Daktronics has paused its stock buyback and dividend programs. Operating expenses came in 24% below the year-ago period's. Capital expenses decreased by 30%.
In the earnings call, Kurtenbach said that the future looks brighter as several coronavirus vaccines are drawing close to final approvals. The world might get back to large-scale live events in 2021.
"For fiscal 2022 and beyond, we continue to see positive signs and believe we have the ability to grow over the long term," he said. "We enter the second half of fiscal 2021 with a strong backlog and signs of promising vaccines that can lead to stabilization in the world's economy."
The long-term view
Kurtenbach's positive projections for the long haul sound good, but I'm not sure we can take his words at face value. Daktronics has a long history of setting high expectations and falling short. The company delivered positive earnings surprises in just 5 out of its last 20 reports. The same ratio holds true for revenue estimates. Analysts tend to shape their estimates around management's guidance targets, so it's starting to look like an unhealthy pattern.
It's not like the COVID-19 crisis interrupted Daktronics in the middle of a fantastic growth trend. Sales have trended largely sideways in the last five years, alongside unpredictable cash flows and steadily declining bottom-line earnings.
Kurtenbach described his business goals in the fall of 2014 as "growing profitably over the long term." We Daktronics investors haven't seen a whole lot of that recently.
My Daktronics holdings have lost 40% of their value in five years, and that includes the effect of reinvesting the once-generous dividends along the way. The broader market, as measured by the S&P 500 stock index, more than doubled over the same period.
Should I stay or should I go?
I have a few reasons for holding on to my Daktronics shares for a while longer. The best holding period is forever, assuming the company you own is creating value over time. Daktronics is struggling harder under the coronavirus pandemic, so the stock is probably a bit undervalued right now. Selling out near multiyear lows will lock in these plunging stock prices.
At the same time, the market is full of much more promising growth stories these days, even if Daktronics manages to bounce back from this dark period in 2021 and beyond. The cash I invested in this troubled stock could be put to much better use elsewhere.
I think it's time to cut bait on Daktronics. This long-suffering turnaround idea just doesn't look realistic anymore.