Three months ago, Daktronics (DAKT -0.87%) missed Wall Street's first-quarter estimates but noted that long-term orders were still healthy. The stock plunged more than 25% lower on the news, and I picked up a few shares at those two-year lows.
This week, Daktronics is back with a second-quarter update. Revenue billings fell 9% year over year to $158 million; GAAP earnings per diluted share dropped from $0.18 to $0.07. Needless to say, both results came in far below analyst projections calling for earnings near $0.19 per share and sales of roughly $175 million.
Daktronics shares had been climbing back up from the first-quarter crash, but lost all of those three-month gains on Tuesday. The stock plunged as much as 29% lower before recovering somewhat and stabilizing at a 20% lower level.
So we're back to setting new multiyear lows, and my recent gains have been wiped clear off the table.
Year to date, Daktronics shareholders have now seen the stock slide 36% lower, or 34% when you take the company's 4% dividend yield into account. So am I betting on a losing horse here?
The medium becomes the message on this Daktronics road sign: "Expect delays," indeed. Image source: Daktronics.
Let's have a look at the reasons behind Daktronics' latest plunge.
The low sales figure resulted mostly from softness in the live events and commercial divisions.
In the commercial segment, Daktronics pointed to lower demand for billboards and the timing of some one-shot "spectaculars" sales, meaning unique display products meant for holiday parades and the like. These are potentially serious concerns, and I'll keep a close eye on how the actual holiday season plays out for Daktronics' commercial operations.
But the live events weakness is far less concerning.
"Since we could maintain our delivery promises to customers, we chose to delay production during the quarter to take advantage of new designs with enhanced reliability features and expected lower production costs," said Daktronics CEO Reece Kurtenbach in a prepared statement.
To me, that's a downright clever move. Daktronics is sacrificing short-term sales volume in exchange for higher gross margins and lower risk of returns in future quarters. When a single installation can make a serious difference to the top and bottom lines, putting safety first seems like the best choice.
That's especially true when gross margins have been falling in recent quarters. Trailing gross margins are still hovering above the 20% mark, including a 22.5% figure in the second quarter, but the long-term trend is negative. Time to put a stop to that issue, and I don't mind if Daktronics delays some revenue collections in order to get this done.
The order backlog remains juicy, currently sitting at $184.2 million. This gives the company the freedom to pick and choose its project deliveries, adding to the quarterly lumpiness but also providing a more secure long-term revenue flow.
The biggest true challenge reported in this quarter came from the order book, as incoming orders fell 9% year over year. Daktronics landed a few key orders from clients such as the Miami Dolphins and the New York City Metropolitan Transit Authority, but international orders are lagging and high school systems are not in high demand these days.
Finally, let me point out that Daktronics is a chronically under-followed and thus easily misunderstood company. Only three Wall Street firms offer estimates for quarterly results. Citing the unpredictable nature of its lumpy sales, Daktronics' management doesn't offer any forward guidance. So this is the kind of company and stock that only makes sense after following it for a while (or digging into its business history with a vengeance). It's a micro-cap stock with very low trading volumes, even on a big price change like Tuesday's.
All in all, I remain convinced that Daktronics is a good buy at these price levels. The order backlog is enough to keep me aboard, and the stock is now trading at just 11 times forward earnings estimates.
I don't want the lower order growth to become a habit, and am keeping another wary eye on the gross margins. But there's tremendous value locked away in this little stock if Kurtenbach can deliver on his long-term goals. And at this point, I don't see why he wouldn't.
