"Signs, signs everywhere a sign
Blocking out the scenery, breaking my mind
Do this, don't do that, can't you read the sign."
"Signs," Five Man Electrical Band (1971 hit song)
Let's be politically correct. They are not signs. Sigh. They are "visual communication systems." To shareholders of Motley Fool Stock Advisor pick Daktronics (NASDAQ:DAKT), they are the fuel for a stock price that has increased by 12.5 times over the last 10 years.
Visit the company's website and you'll see scoreboards, electronic displays, and large video-screen systems. These are not your regular static roadside signs. They are high-tech -- and sports-related ones (like scoreboards) were 61% of sales when the company announced fourth-quarter results this week.
Sales for the quarter were up 5.9%, and net income fell sharply, down 27.8% to just short of $3 million. The fall in gross margins was attributed to competitors' aggressive pricing. The fall in operating margins was due to a higher number of marketing initiatives, international expansion (including the initial steps for doing business in China), and research and development (R&D) costs that exceeded the long-term goal of 4% of sales (primarily for a new generation of the ProTour line). The good news is the company expects all areas of operating expenses to decline in the coming quarter.
On the surface, the news is mixed. Highly competitive pricing is to be expected in a market where product innovation has led to falling prices, but it is hoped the R&D initiatives will keep prices competitive via innovation. Strong marketing costs are aimed at pushing sales to higher levels. Marketing expenditures were up and took a bite out of margins for the previous fourth quarter and year, but proof that this money was well spent is the company's large $73 million order backlog (up 35.2% from last year's fourth quarter and roughly equal to next quarter's expected sales).
Mixed news or not, its products have long sales cycles, and Daktronics is in a "high mix, low volume" business (that is, there are many configurations to sell, but the overall sales volume of each potential item is low). One serious concern is the concentration of sales in sports-related areas, although commercial sales, which made up 28% of total sales, were up 40% in the fourth quarter. A sharp economic downturn could hamstring sports attendance and curtail customer budgets for scoreboards and other sports signs.
Daktronics expects sales to grow 15% for the fiscal year ending in April 2006. First-quarter earnings, though, are forecast to be $0.22 to $0.32 a share -- leaving open the possibility that earnings might be flat or below the $0.25 earned in the first quarter of last year.
Analysts expect the company to earn $1.00 a share this year (up from $0.89 last year) and for earnings to accelerate to $1.31 in fiscal 2007, valuing the stock at 16.8 times forward earnings. Given Daktronics' strong balance sheet -- the company has more than enough cash to support continued growth in R&D and marketing spending if needed -- and the strong outlook for 2007, this small-cap stock looks reasonably priced compared with its growth prospects.
Fool contributor W.D. Crotty does not own shares of Daktronics. Click here to see The Motley Fool's disclosure policy .
