Today is turning out to be a disappointing one for shareholders in Motley Fool Stock Advisor selection Daktronics (NASDAQ:DAKT). Despite reporting a 23.5% increase, or $0.21 per share, in fiscal fourth-quarter profits, and a 39% increase, or $0.89 per share, for fiscal 2004 as a whole, Wall Street dumped the company's shares, driving its price down 10% earlier today in trading.

This maker of video displays larger than owners of big-screen televisions made by Sony (NYSE:SNE) and Philips (NYSE:PHG) can even dream about predicted that revenues for 2005 would grow by 12% to 19%. But Daktronics will have to hit the top rung to beat its performance this year, in which it clocked 18% revenue growth.

Still, if it can increase profits by 39% on an 18% increase in sales, then even assuming its margins next year do not improve over the just-reported figures, we are looking at a likely minimum of 26% (and possibly 41%) growth in earnings in 2005. That would translate to somewhere between $1.12 and $1.25 in profits next year, giving the company a forward P/E of 18 to 20.

Let's average that out and call the forward P/E "19." To merit a PEG of 1.0 -- the rule-of-thumb measure of a "fair price" for value investors -- the company would only need to achieve earnings growth of 19% next year. Given that it is likely to make 26% growth, at minimum, you really have to come to the conclusion that Daktronics is now undervalued by about 27% -- and perhaps by as much as 54%.

And that is not even considering the fact that the market at large is currently valued at a PEG of 1.6. Relative to the market as a whole, Daktronics has been marked at least "half off."

So to sum up, this is my read on the Daktronics situation: The market seems to be overreacting to a slight and very short-term operating margin decrease (from 11% to 10.7% for the quarter), while ignoring the fact that operating margins increased from 11.1% to 13.1% for the year.

Fortunately for Motley Fool Stock Advisor members, Tom warned us in January that Daktronics' quarter-to-quarter performance (and stock price) was going to be "lumpy," because the company focuses on managing its business rather than massaging its numbers. Tom suggested that we focus on the company's long-term performance and "consider adding to your position on weakness." I second that suggestion today.

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Fool contributor Rich Smith owns shares of Daktronics, but not of any other company mentioned in this article.