(DAKT - - $16.12) 26, 2003 DAKT

Transcription

1 Dennis Nielsen (612) Consumer Products - Durables August 26, 2003 Financial Summary Rev (mil) A 2004E July $40.2 $44.1 $48.9A Oct $41.6 $48.1 $54.8E Jan $30.9 $38.2 $43.6E April $36.1 $47.4 $54.3E FY $148.8 $177.8 $201.6E P/Sales 2.0x 1.7x 1.5x EPS A 2004E July $0.08 $0.16 $0.22A Oct $0.10 $0.21 $0.20E Jan ($0.02) $0.10 $0.11E April $0.08 $0.17 $0.21E FY $0.25 $0.64 $0.74E P/E 64.4x 25.2x 21.8x Price: $ Week Range: $19.38-$8.55 Target: $22 Rating: BUY Shares Outstanding: 18.6 mil Float: 13.5 mil Mkt. Capitalization: $300 mil Avg. Volume: 123,800 Instit. Ownership: 37% BV / Share $3.74 Debt / Tot. Cap.: 6.2% Est. LT EPS Growth: 20% Exp. Next Rpt. Date: 11/20 Company Description Daktronics, Inc. designs, manufactures, sells and services dynamic visual communication systems for customers worldwide. Since inception in 1968, the Company has installed tens of thousands of scoreboards and display systems in more than 70 countries. Daktronics, Inc. (DAKT - $16.12) DAKT reports record Q1 results. BUY Key Points: Q1 revenue increased 11% to record $48.9 million. Q1 earnings increased 38% to $4.3 million, also record quarterly net income. Reported EPS of $0.22 was ahead of guidance of $0.13 to $0.19. Backlog was up sharply to $56 million from $50 million at year-end and at Q Guidance remains for FY 2004 revenues to increase to a range of $195 to $210 million, up 10% to 18% from We expect earnings to increase accordingly. Q2 guidance is for revenues to increase to $50 to $55 million with EPS in a range of $0.15 to $0.22 compared to last year s $48 million and $0.21. We raised our FY 2004 EPS estimate a penny to $0.74. Our price target remains $22 based on a P/E multiple of 30x our FY04 (April) EPS estimate of $0.74. Investment Recommendation: Daktronics reported Q1 results that set records for the period and exceeded our estimates. Revenue for the period increased 11% to $48.9 million slightly below our estimate. Net income for the quarter, however, improved to $4.3 million vs. $3.1 million a year ago. EPS of $0.22 was up 34% compared to last year s result and ahead of our estimate of $0.18. The net income margin was a record 8.8% in Q Daktronics continued to receive strong order flow. Backlog at the end of Q1 was $56 million compared to $50 million at the end of Q4. The Company announced several high-profile sports applications, including major league football sites. The backlog includes transportation and commercial application orders as well. Guidance for FY2004 was not changed and the company expects revenues to increase 10% to 18% and earnings to increase accordingly. During Q1, the Company paid off over $3 million in long-term debt, and increased cash by $2 million. We are impressed by the strength of the Company s business and have raised our FY04 EPS estimate. The stock is rated BUY with a 12-month price target to $22. Source: Reuters Feltl and Company Research Department. 120 South Sixth Street, Suite 2600 Minneapolis, MN Please see important disclosures at end of report.

2 First Quarter FY2004 Results Daktronics reported record first quarter sales and earnings for the period ended August 2, Revenues for the 13-week period increased 11% to $48.9 million. Net income increased 38% to $4.3 million, or $0.22 per share, versus $3.1 million, or $0.16 per share, a year ago. Both sales and net income were records for any quarter in the company s history. EPS guidance for the quarter was $0.13 to $0.19. First quarter sales included several major league sport display systems for Lambeau Field, Soldier Field in Chicago and the new home of the Philadelphia Eagles, among others. Commercial backlog increased with the booking of standard products and large horse racing systems in California and Paris. Gross margin for Q1 increased 100 basis points to 35.7% of sales compared to the period a year ago. Sequentially, gross margin increased 260 basis points compared to Q4. The Company continued to enjoy lower raw materials costs during the quarter, but attributed the strong gross margin to excellent on-site installation management on several large systems. Going forward, we look for gross margins to decline modestly, but remain above 30%. Operating expenses of $10.8 million increased 4.5% from the comparable period a year ago, but declined as a percent of sales. General & administrative, and product design & development expenses each increased as a percent of sales compared to the year ago period while selling expenses declined. The operating margin for Q was 13.7% of sales compared to 11.4% for Q1 in The net margin for Q was an all-time record 8.8% of sales. Daktronics ended the quarter with a backlog of $56 million compared to a backlog of $50 million at the end of the year. The first quarter marked the 6 th consecutive quarter with a backlog of $50 million or more. The Company continued to strengthen its balance sheet during the quarter. Long-term debt, including the current portion, was reduced $3.7 million to $4.6 million, down from $13.8 million in April Long-term debt represents 6.2% of total capital, down from 21.2% at that time. Daktronics ended the quarter with $11.2 million in cash up from $9.3 million at fiscal year-end. Working capital was $39.3 million. Outlook & Valuation The company provided guidance for Q2 and for fiscal year 2004 with the Q1 earnings release. Sales for the second quarter are expected to be in a range of $50 to $55 million, with earnings in the range of $0.15 to $0.22 per share. For the year, revenues are expected to be in the range of $195 to $210 million, up 11% to 18% over the FY 2003 results. The company went on to say that earnings are expected to increase accordingly, despite slightly lower projected gross margins. Our model for the fiscal year 2004 has been revised to conform to the guidance provided by the company. We expect the company to continue to demonstrate solid growth in the sports and transportation sectors of their business with improving contribution from the commercial sector as the economy improves. The company derives approximately two-thirds of sales from the sports market, approximately 15% from the commercial sector and 10% from transportation. The balance is derived from service, primarily. Page2 Daktronics, Inc. (DAKT) 8/26/03

3 The company has guided expectations for slightly lower gross margins in 2004 than seen in Favorable pricing on some projects and some raw materials seen in 2003 are not expected to be repeated in the coming year. Nonetheless, we expect overall operating profit margins to advance slightly with continued expense management and operating leverage. Our forecast is for sales to advance about 13% to $201.6 million and operating margins to increase to 11.5% in 2004 from 11.2% for Net income is expected to reach $14.7 million, up 18%, and EPS is projected at $0.74 compared to $0.64 reported for Valuation Method for Determining Price Target Our 12-month price target of $22 is based on the stock trading at 30 times our FY04 EPS estimate of $0.74. DAKT currently trades at 21.8 times projected FY04 EPS. We think the stock can support a premium valuation to its growth rate based on its leadership position, solid operating performance, the diverse markets it serves and its ongoing investment in technology. Risks To Achievement of Price Target The computer-programmable information display industry is highly fragmented and intensely competitive in certain markets. There are several established manufacturers of competing products who may have greater market penetration in certain markets or greater financial resources than Daktronics. The Company s products are often included in their customers marketing budgets, therefore, to some extent, the Company can be competing at times with other forms of advertising, such as television, print media or fixed display signs. Daktronics backlog includes customer sales agreements and purchase orders that it expects to complete within 12 months. However, sales agreements and purchase orders are subject to cancellation or delay with little or no penalty, backlog is not necessarily indicative of future net sales. The Company has found areas, both domestically and internationally, that prevent or restrict the installation of outdoor signs and computer-programmable information displays. These concerns are generally related to aesthetics or driver safety if an animated or moving display is located near a road or highway. These factors may prevent or limit the Company from selling products in certain areas. Readers should recognize that the risks noted here or referenced do not represent a comprehensive list of all risk factors or potential issues, nor all factors that may preclude price target achievement. Additional risk factors exist and are outlined in the Company s SEC filings. Analyst Certification I, Dennis Nielsen, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Page3 Daktronics, Inc. (DAKT) 8/26/03

4 Daktronics, Inc. Summary Financials Source: Company reports and Feltl and Company. FY01 FY02 Q1A Q2A Q3A Q4A FY03A Q1A Q2E Q3E Q4E FY04E Figures in (000) expcept per share amts. 8/3/02 11/2/02 2/1/03 5/3/03 8/3/03 11/2/03 2/1/04 5/3/04 Net Sales $152,331 $148,773 $44,107 $48,074 $38,220 $47,364 $177,764 $48,918 $54,800 $43,600 $54,300 $201,618 % change in sales 23.5% -2.3% 9.6% 15.6% 23.8% 31.2% 19.5% 10.9% 14.0% 14.1% 14.6% 13.4% Cost of Sales: 107, ,741 28,783 32,288 25,855 31, ,633 31,468 37,264 29,648 36, ,304 Gross Profit 45,221 45,032 15,324 15,786 12,365 15,657 59,131 17,450 17,536 13,952 17,376 66,314 Selling 18,805 22,009 6,807 5,974 5,868 6,317 24,966 6,429 6,700 6,500 6,600 26,229 General & Administrative 6,280 6,478 1,652 1,683 1,824 2,263 7,422 2,122 2,200 1,840 1,934 8,096 Product Design & Development 5,685 7,442 1,830 1,721 1,534 1,833 6,918 2,205 2,400 2,100 2,120 8,825 Operating Income 14,451 9,103 5,035 6,408 3,139 5,244 19,825 6,694 6,236 3,512 6,722 23,164 Non-Operating Income (Expense) Interest Income Interest Expense (1,599) (1,542) (255) (226) (195) (222) (897) (234) (150) (150) (150) (684) Other 346 (242) Income Before Income Taxes 13,965 8,142 5,158 6,401 3,186 5,851 20,596 7,131 6,356 3,632 6,842 23,961 Income tax provision 5,275 3,245 2,024 2,376 1,288 2,419 8,107 2,812 2,447 1,398 2,634 9,292 Minority interest in inc. of subsidiary (10) (21) (31) (11) (11) Net Income $8,685 $4,892 $3,134 $4,025 $1,888 $3,411 $12,458 $4,308 $3,909 $2,234 $4,208 $14,658 % change in N.I. 39.5% -43.7% 99.1% 99.7% n.m % 154.7% 37.5% -2.9% 18.3% 23.4% 17.7% Diluted earnings per share $0.46 $0.25 $0.16 $0.21 $0.10 $0.17 $0.64 $0.22 $0.20 $0.11 $0.21 $0.74 % change in EPS 36.1% -44.7% 100.8% 98.7% n.m % 151.0% 33.9% -5.4% 17.4% 22.2% 15.7% Weighted average shares 18,874 19,230 19,292 19,308 19,697 19,739 19,514 19,804 19,825 19,850 19,925 19,850 % of Sales: Cost of Sales 70.3% 69.7% 65.3% 67.2% 67.6% 66.9% 66.7% 64.3% 68.0% 68.0% 68.0% 67.1% Gross Profit 29.7% 30.3% 34.7% 32.8% 32.4% 33.1% 33.3% 35.7% 32.0% 32.0% 32.0% 32.9% Selling 12.3% 14.8% 15.4% 12.4% 15.4% 13.3% 14.0% 13.1% 12.2% 14.9% 12.2% 13.0% General & Administrative 4.1% 4.4% 3.7% 3.5% 4.8% 4.8% 4.2% 4.3% 4.0% 4.2% 3.6% 4.0% Product Design & Development 3.7% 5.0% 4.1% 3.6% 4.0% 3.9% 3.9% 4.5% 4.4% 4.8% 3.9% 4.4% Operating Income 9.5% 6.1% 11.4% 13.3% 8.2% 11.1% 11.2% 13.7% 11.4% 8.1% 12.4% 11.5% Net Income 5.7% 3.3% 7.1% 8.4% 4.9% 7.2% 7.0% 8.8% 7.1% 5.1% 7.7% 7.3% Tax Rate 37.8% 39.9% 39.2% 37.1% 40.4% 41.3% 39.4% 39.4% 38.5% 38.5% 38.5% 38.8% Backlog at period end $51,000 $50,000 $51,000 $51,000 $50,000 $50,000.0 $56,000 Balance Sheet Data: Cash & cash equivalents $2,896 $2,097 $3,232 $8,991 $8,863 $9,277 $11,182 Accounts receivable $21,090 $17,878 $24,670 $19,410 $15,274 $25,912 $24,716 Inventories $19,719 $16,472 $18,482 $16,248 $17,018 $14,863 $17,827 Working capital $26,967 $28,353 $32,333 $37,079 $37,453 $39,700 $39,307 Long-term debt $10,344 $9,574 $8,947 $7,631 $5,926 $8,400 $4,628 Shareholders' equity $45,823 $51,501 $54,816 $58,900 $61,146 $65,303 $69,864 Book value $2.55 $2.82 $2.99 $3.21 $3.32 $3.52 $3.74 Page4 8/26/03

5 Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months, and a three-tier system for risk assessment. Potential Total Return Assessment Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds. Related Risk Assessment Speculative: Business and financial risks are significantly greater than the market risk. The company has an inconsistent operating history and the share price may have significant volatility. Aggressive: Business and financial risks are higher than the market risk. The company has a history of revenue growth and/or operating profits. The share price may be more volatile than the general market. Market: Business and financial risks are in line with the general market. Disclosure Statement The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. Conflicts of Interest Investors should assume that Feltl and Company is seeking or will seek investment banking or other business from the companies in our research universe. From time to time, Feltl and Company, or its officers, directors or agents, or members of their families, may have a position in securities mentioned and may make purchases or sales of the same in the open market or otherwise, and may own options, rights or warrants to purchase the same. Feltl and Company may be a market maker and may act as principal or agent with respect to the sale or purchase of securities mentioned, and may have managed or co-managed a public offering of the securities mentioned within the last three years. Additional information is available upon request. Feltl & Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl & Company could act as principal or agent with respect to the purchase or sale of those securities. As of the end of the month preceding the date of publication of this report, Feltl & Company did not beneficially own 1% or more of any class of common equity securities of the subject company. Feltl & Company has not been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. The analyst or any member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Page5 8/26/03

6 No director, officer or employee of Feltl & Company serves as a director, officer or advisory board member to the subject company. Feltl & Company has not served as a broker, either as agent or principal, buying back stock for the subject company s account as part the company s authorized stock buy-back program in the last twelve months. Feltl & Co. may possibly serve as the company s broker, either as agent or principal, as part of the company s authorized buy-back program in the next three months. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. Feltl and Company Ratings Distribution Ratings Distribution for Feltl & Co. 8/26/03 Hold 17% Sell 3% SB/Buy 80% Feltl and Company provided investment banking services for 4% of the research covered companies over the last twelve months, of which one was rated Buy/Strong Buy and none were rated Hold. Buy-1/30/03 $18 Pr.Tgt. Buy-2/20/03 $19 Price Tgt. Buy-6/05/03 $22 Pr. Tgt. Buy-8/26/03 $22 Pr. Tgt. Date Nature of Report Rating Price Target 1/30/03 Coverage Initiated BUY $17-$19 2/20/03 Quarterly update BUY $18-$20 6/05/03 Quarterly update BUY $22 8/26/03 Quarterly update BUY $22 Page6 8/26/03

7 EQUITY CAPITAL MARKETS DIRECTORY RESEARCH DEPARTMENT Ernest W. Andberg, CFA Dennis E. Nielsen, CFA Richard A. Ryan (612) Joseph P. Sullivan, CFA (612) INSTITUTIONAL SALES: (866) Thomas Pierce Senior Vice President Institutional Sales (612) Mark Hagen (612) Paul M. Manley Ryan Quade (612) TRADING: (866) Jo Pihl Senior Vice President (612) James G. Fredericks Vice President Manager, Equity Trading (612) Joseph G. Fredericks (612) Daniel L. Hennen (612) William W. Koop (612) Deborah L. Zieman Institutional Sales Trading (612) /03/ SOUTH SIXTH STREET SUITE 2600 MINNEAPOLIS, MINNESOTA (612) (866) MEMBER SIPC & NASD