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Daktronics (DAKT-L) By Chase Pion and Cameron Thum

Business Model

Financial Data

S  Stock Price: $12.32

S  52 Week Range: $7.57-12.47

S  Market Cap: $523.93 million

S  Dividend Yield: 3.3%

Financial Data

Daktronics Peer Average

Price to Earnings 24.64 26.16

Price to Book 2.46 6.01

Price to Sales 0.89 7.71

Past Growth

Average Annual Revenue Growth (over past 3 years)

9.68%

Quaterly (YoY) Operating Margin Growth

3.8%

Quarterly (YoY) EPS Growth

165%

More Financial Data

Orders

Commercial (0.8%)

Live Events 2.5%

Schools & Theaters

10.7%

Transportation 33.4%

International 44.7%

Selling Expense

Commercial (1.6%)

Live Events (1.9%)

Schools & Theaters

(3.4%)

Transportation (6.2%)

International 14.5%

Thesis Points

S  Diversification of Products and Customers

S  Lack of Competitors

S  Digital Outdoor Advertising Market

S  Room for Growth

S  High Dividend Yield

Diverse Product Offerings

Financial Benefit from Diversification

Diverse Customer Base

S  Sport & Theater – Arenas of any size and scope

S  Commercial – Any business that uses signage to attract customers

S  Transportation – Government departments and others

Lack of Competition

Daktronics (DAKT) LSI Industries (LYTS)

Revenue 518.32 280.79

Gross Profit 133.89 60.41

Operating Income 30.60 0.63

Net Income 22.78 -0.12

Patent Net Value 0.78 0.015

R&D Yearly Costs 23.1 6.1

In Millions

Lack of Competition

S  Daktronics has integrated super systems at:

S  21 of 31 NFL facilities, 20 of 30 MLB facilities, 10 of 29 NBA facilities, 17 of 30 NHL facilities

S  Daktronics has scoring and/or display equipment at:

S  27 of 31 NFL facilities, 24 of 30 MLB facilities, 21 of 29 NBA facilities, 23 of 30 NHL facilities, 9 of 17 MLS facilities

Lack of Competition

Benefits of Digital Outdoor Advertising

S  Enables “smarter” advertising, which also allows companies to charge higher prices for advertising as advertisers get greater return

S  What “smarter advertising” looks like – schedule multiple clients per day, time-specific adverts, flexibility of duration, interactive alerts

S  Traditional advertising methods (TV, radio, newspaper) ineffective due to many factors, effective online advertising difficult – here’s an easy way to reach broad, guaranteed audience easily

S  Study by Arbitron found that nine out of ten people notice the advertising copy on digital billboards "most of the time." Additionally, nearly two out of three agree that digital billboards are an appealing way to advertise. Finally, recall by consumers of specific brands reaches 50% for some advertisers -- initial results show this has increased revenues by factor of 6-10x on converted displays

Digital Billboard Market

Room For Growth

S  Cost of LED billboard screen manufacturing has fallen 50% in past five years – costs expected to continue to decrease

S  Costs of operating the billboards fallen significantly as well (energy usage of these are down 50%) -- enables new digital billboard locations that in the past were not profitable

S  Increasingly favorable regulatory environment (initially was opposition for safety risks, distracting for drivers, but now can have important role in displaying emergency warnings)

S  Digital billboards are fastest growing segment of outdoor advertising market, number of billboards doubled since 2007 (only 1,800 digital billboards out of 450,000 billboards nationally)

Dividend Yield

S  Declared a quarterly dividend of $.36 annualized, change from semi-annual cash dividend (annual yield 3.3%)

S  “Given our cash and marketable securities position and our confidence in our ability to continue to generate free cash flow from the business over the long-term, the Board has approved the payment of a regular quarterly dividend.” – Jim Morgan, president & CEO

Risks

S  Inconsistent Financial Record

S  Supply Chain Issues

S  Regulatory Restrictions

Inconsistent Financial Record

Supply Chain Issues

S  Relatively small company that takes large orders from a broad customer base – efficiency on deliver is key

S  Have encountered issues in a manufacturing plant constructed in 2007, inefficient delivery can lead to a deal tanking, each deal worth millions

S  Have significantly improved this – investment in supply chain resources to improve ship date to promise date has paid off, as they now average two days early for std. order

Regulatory Issues

S  Extensive consideration regarding digital billboards in municipalities (St. Louis, Philadelphia, Los Angeles, Denver)

S  Recent study by Federal Highway Administration says they don’t violate ban on intermittent, flashing, or moving lights

S  2 second look away considered to be “distracting” by a regulatory standard – digital billboards divert eyes for 2.1 sec, but means they’re doing their job

S  Banned in Los Angeles

S  DAKT creating mechanisms to get around regulations – light dimmers, lawsuits (executed by outdoor advertisers primarily), placement, studies showing no correlation b/w accidents

VAR

S  “I think that looking ahead, the biggest issue for Daktronics is not going to be a drop off in orders or regulatory hindrances – 1) because they’re well-established as a leader and 2) because the outdoor advertising firms will challenge every digital billboard ban in court. They’re biggest issue is going to be their own supply chain – and while it’s somewhat disconcerting they don’t have this more optimized by now, the benefit of this is that this is something they have full ability to change.” -- Morris B. Ajzenman, Researcher with Griffen Securities

Recommendation

S  We should initiate a 4% long position in Daktronics