Can Daktronics Overcome Its Growth and Tax Hurdles?

Summary

• Daktronics has transformed into a more efficient, high-margin business but operates in a mature, slow-growth industry, limiting long-term revenue expansion.
• Despite strong free cash flow and prudent capital allocation, Daktronics' high effective tax rate and low revenue growth present challenges.
• Valuation suggests limited upside unless revenue growth accelerates or tax burdens decrease, making it an unsuitable investment for my criteria.

Investment thesis

Over the past decade, Daktronics Inc. (NASDAQ:DAKT) has successfully transformed into a more efficient and high-margin business. However, the company operates in a mature, slow-growth industry, limiting its long-term revenue expansion. While its operating efficiencies and cost controls have driven profit growth, its high effective tax rate poses challenges.

Daktronics generates strong free cash flow, requires minimal reinvestment, and has prudent capital allocation strategies. My valuation suggests limited upside unless revenue growth accelerates or tax burdens decrease. This is not an investment opportunity for me.

Business background

Daktronics is a leader in digital display solutions. With a diversified product lineup and strong market presence, the company operates through five primary business segments:

• Commercial – Digital billboards, retail displays, and advertising solutions.
• Live Events – Large-scale video display systems for sports stadiums, arenas, and entertainment venues.
• High School Park and Recreation – Scoreboards and video displays for high schools, parks, and community centers.
• Transportation – LED message boards and wayfinding signage for highways, airports, and transit systems.
• International – This segment covers most of Daktronics' products in markets outside North America​.
• As seen from Chart 1, Daktronics is a US-centric business with the Live Events segment as the biggest revenue contributor.

Chart 1: Revenue by Segment and Revenue by Geographies

Note: The 2025 performance was based on doubling the YTD Oct 2024 performance.

The US digital display market is a single-digit growth one as exemplified by the following market research reports.

“The US digital signage market is estimated at USD 9.16 billion in 2025 and is expected...at a CAGR of 7.88 % during the forecast period (2025 to 2030)” Mordor Intelligence.

“The U.S. digital signage market size was estimated at USD 6,364.1 million in 2024 and is anticipated to grow at a CAGR of 6.6% from 2025 to 2030.” Grand View Research

Based on these reports, I would estimate that Daktronics had about 9 % to 13 % of the US market.

Note that Daktronics has April as its financial year-end. In this article, unless stated otherwise, the years refer to the financial year. Also, the 2025 performance was based on the LTM Oct 2024 performance.

Operating Performance

Over the past decade, the company delivered a revenue growth of 4.1 % CAGR. However, PAT achieved a much higher growth rate of 34.5 % CAGR. Refer to the left part of Chart 2.

You can get a sense of the reasons for this discrepancy from the operating profit profile shown in the right part of Chart 2. I would summarize them as follows:

• Margin expansion. For example, the average gross profit margin for 2016/17 was 22.6 % compared to the 26.6 % average for 2024/25. This is reflected in the better contribution margin.
• Operating leverage. Fixed cost as a % of the total cost is low at about 23%. With such a low cost, an increase in revenue would have a significant impact on the profits. The “stable” fixed cost led to a reduction in the fixed cost margin from an average of 24% for 2016/17 to an average of 19% for 2024/25.

Chart 2: Performance Index and Operating Profit Profile

Note to Op Profit Model. I broke down the operating profits into fixed costs and variable costs.

• Fixed cost = SGA, Depreciation & Amortization, R&D and Others.
• Variable cost = Cost of Sales – Depreciation & Amortization.
• Contribution = Revenue – Variable Cost.
• Contribution margin = Contribution/Revenue.

Changing business profile

Looking at the left part of Chart 2, you can see that the average annual revenue and profits post-2022 were significantly higher than those pre-2021. Note that the 2021 revenue dip was due to the COVID-19 pandemic.

I would attribute these to the changing business profile over the past decade. The company has transformed into a diversified, technology-driven, and high-margin business.

• The higher-margin segments (Transportation, High School & Recreation) gained traction. Refer to the left part of Chart 1.
• “Fewer supply chain and operational disruptions paired with our investments to increase capacity allowed for improved operational efficiency” 2024 Form 10k.
• There was a shift toward software and services that created recurring revenue.

Efficiency

While the changing business profile led to better revenue and profits, I wanted to see whether the factors driving them were sustainable. I have already mentioned better gross profit margin and lower fixed-cost margin. These in turn were driven by improving efficiencies.

However, in the context of efficiency, I prefer to break them into operating and capital efficiency.

• Operating efficiency as per the left part of Chart 3. Except for the inventory turnover, there are improving signs in the other 3 metrics.
• Capital efficiency as per the right part of Chart 3. Apart from the better cash conversion cycle, there were no significant improving trends for the other 3 metrics. At the same time, there was only a slight improvement in gross profitability over the past decade as shown in the left part of Chart 2.

These findings suggest that Daktronics' business transformation has delivered sustainable operating efficiency. But the company need to focus on improving its capital efficiency.

Chart 3: Efficiency

Taxes

Over the past decade, the company’s effective annual tax rate ranged from 22 % to 5,554 %. There was only one year when the tax rate was below 30%. Even if I ignored the 5,555 %, the average annual tax rate was 44%.

I am not a tax expert, but from what I could gather from the various forms of 10k, the high effective tax rate was due to non-deductible expenses and valuation allowances, compounded by state and foreign taxes.

Growth prospects

In 2022 and 2023, the company achieved a double-digit growth rate. A big part of this growth was due to the company clearing backlog caused by the pandemic.

“Our product order backlog as of April 30, 2022, was USD 471.6 million as compared to USD 250.7 million as of May 1, 2021. This increase in backlog is …due to supply chain challenges.” 2022 Form 10k

“Our product order backlog as of April 29, 2023, was USD 400.7 million…This decrease in backlog is driven by fulfilling orders…” 2023 Form 10k.

However, by 2024, revenue growth reduced to a single-digit growth rate and I would expect this single-digit growth rate to continue moving forward.

“Our product order backlog as of April 27, 2024, was $316.9 million… The decrease in backlog… is a result of fulfilling orders at a greater pace in fiscal 2024 as supply chain conditions stabilized and production lead times improved…” 2024 Form 10k.

“Our product order backlog as of October 26, 2024, was $236.0 million…The decrease in backlog to more historical levels is a result of fulfilling orders at a greater pace as supply chain conditions have stabilized and production lead times have improved…” Oct 2024 Form 10q.

You must remember that the company's historical single-digit growth rate reflects a decade of efforts to reshape its business profile. Despite these changes, it still struggled to break out of its low topline growth.

You may argue that the international market may offer the company an avenue to deliver a better growth rate. However, its track record here has not been impressive. If you refer to the right part of Chart 1, you can see that revenue from its international operations over the past decade shrank.

Unlike companies that require heavy reinvestment to sustain growth, Daktronics has successfully scaled operations without excessive capital demands.

Over the past decade, Daktronics has maintained an average Reinvestment rate of just 13%, which is relatively low for an industrial technology company. This efficient capital allocation strategy has allowed the company to grow while returning a significant portion of NOPAT to shareholders.

Reinvestment = CAPEX & Acquisitions – Depreciation & Amortization + increase in Net Working Capital

Reinvestment rate = Reinvestment/NOPAT.

Peer comparison

I compared Daktronics’ performance with several publicly listed companies in the digital signage and display sector. I excluded the giants such as Samsung, LG Electronics, Sharp NEC, Sony, and Panasonic Corporation.

You can see from Table 1 that Daktronics is a mid-size player in terms of 2024 revenue with comparable revenue growth. The panel revenue growth reflects the single-digit market growth rate mentioned earlier.

Table 1: Peer revenue

Note

• Barco NV is a Belgium company that develops visualization solutions, including digital signage displays and systems.
• LSI Industries is a US company that provides non-residential lighting and retail display solutions, serving the commercial and industrial sectors.
• Leyard Optoelectronic is a Chinese company that specializes in LED display products and solutions, serving various markets globally.

Over the past decade, Daktronics has evolved from being one of the weaker performers among its peers to a standout leader in key financial metrics. My analysis, based on return on capital, EBIT margin, EPS, and levered free cash flow margin, highlights this impressive turnaround. Refer to Charts 4 and 5 for a visual comparison.

• Return on capital and EBIT Margin. Daktronics is now the highest among its peers, showcasing strong profitability and operational excellence.

• EPS and Levered Free Cash Flow Margin. Both have shown consistent improvement, making Daktronics comparable to top-performing companies in the industry.

Chart 4: Peer return on capital and EBIT margin

Chart 5: Peer levered Free Cash Flow margin and EPS

Financial position

I would consider Daktronics to be financially sound based on the following factors. The company is also a cash cow with an effective capital allocation strategy:

• As of October 2024, Daktronics held USD 134 million in cash, representing 24% of its total assets, providing a strong liquidity buffer.
• Over the past decade, it has consistently generated positive cash flow from operations, with only one exception. During this period, it produced USD 323 million in operating cash flow. This is a strong cash conversion ratio relative to its cumulative PAT of USD 100 million.
• The company maintained a low reinvestment rate, ensuring efficient use of capital.
• Its capital allocation strategy has been prudent. As shown in Table 2, operating cash flow comfortably covered CAPEX and acquisitions, with a significant portion of the excess cash returned to shareholders.

Table 2: Sources and Uses of Funds 2016 to 2025

While Daktronics’ debt-to-capital ratio reached 20% in October 2024, its highest in a decade, the absolute debt level remains manageable at USD 65 million. Given its robust cash generation capabilities (refer to Table 2), the company is well-positioned to reduce this debt without financial strain.

Valuation

My analyses found the following.

• This is a company in a mature sector with a single-digit growth rate. Over the past decade, the company only delivered 4.1 % CAGR.
• Nevertheless, the company has been able to grow profits at a double-digit growth rate over the past decade. This was driven by operating efficiency which led to better margins and lower costs. However, there is still work to be done for capital efficiency.
• The company achieved a low Reinvestment rate suggesting that a big portion of the NOPAT can be returned to shareholders.
• The company had an average 44% effective tax rate.

I thus adopted the following picture in valuing the company.

• This is a mature company with a perpetual growth rate of 4% The base revenue would be the 2025 revenue.
• The company would continue to improve its operating efficiency so that in the terminal year,
• The contribution margin would be 10% higher than the base contribution margin.
• The fixed cost margin in the terminal year would be 5% lower than the base fixed cost margin.

The base margins would be the respective 2023 to 2025 margins and would change proportionately annually to reach the terminal margins.

• The company would start with its historically low Reinvestment rate. But this would increase proportionately to follow that given by the fundamental growth equation in the terminal year
• I assumed that the tax rate would be the past decade's high positive tax rate of 44%.

On such a basis, I obtained an intrinsic value of USD 17.23 per share compared to its market price of USD 15.87 per share (13 Feb 2025). There is only a 9 % margin of safety.

Valuation model

I valued Daktronics based on a multi-stage valuation model as shown in Table 3. The WACC used in the valuation model was based on the first page results of a Google search for “Daktronics WACC”. Refer to Table 4.

The basic equations used in the model are:

FCFF = EBIT(1 – t) – Reinvestment.

EBIT = Revenue X Contribution margin – Fixed cost.

Reinvestment was derived from the Reinvestment margin.

Fixed cost was based on Revenue X Fixed cost margin.

Table 3: Calculating the intrinsic value

Notes

1. Fixed rate
2. Pegged to growth rate
3. Assumed proportionate improvement
4. Revenue X fixed cost margin. Assumed proportionate improvements
5. Revenue X Margin and after accounting for Fixed costs. Assumed 44 % tax rate
6. Assumed proportionate change to reach value given by fundamental growth equation in the terminal year
7. b X f
8. FCFF for each year = e - g
9. Assumed constant D/E ratio. Refer to the WACC table
10. NPV for each year = (h X j)
11. Terminal for the year discounted at terminal growth rate
12. 5 years NPV + terminal value
13. Inclusive of any excess TCE. Non-operating assets, MI and Debt
14. Based on the number of shares

Table 4: Estimating the Cost of Funds

Risks and limitations

I based my valuation on the operating model shown in the left part of Chart 6. Looking at Chart 6, you can see that the projected picture is more positive than the historical one.

• The projected Free Cash Flow to the Firm (FCFF) has a steeper trend compared to the one projected based on the log-normal distribution (shown as a dotted line in the right part of Chart 6)

• The projected revenue uptrend is much steeper than the 2023 to 2025 revenue trend.

Chart 6: Projection

The model resulted in the following:

• Average 9 % EBIT margin compared to the average 2023/25 margin of 7 %.

• Average EPS of USD 1.07 per year compared to the USD 0.51 per year average EPS for 2023/25.

• Average 21 % ROIC compared to the average 2023/25 18 % ROIC.

These findings suggest that my valuation is probably a bit optimistic. Is there an upside?

This will come from revenue growth and reduced taxes.

For example, if I assumed that the revenue in Year 1 would grow at 8 % and then reduce proportionately to 4 % in the terminal year, the intrinsic value increased to USD 19.01 per share. This will provide a 20% margin of safety.

If I assume that the revenue growth rate is 4 % from Year 1, but the tax rate is the nominal 24% tax rate, the intrinsic value increased to USD 23.44 per share. There is a 48% margin of safety here.

A combination of higher revenue growth and lower tax rates would provide a much better margin of safety.

I will leave it to you to judge whether the company can overcome its history of low revenue growth and high tax rates.

Conclusion

Over the past decade, Daktronics has successfully transformed itself into a more efficient and profitable company. It achieved strong margin expansion and improved operational leverage.

While the company operates in a mature, slow-growth industry, it has consistently outperformed peers in profitability metrics such as return on capital and EBIT margins. However, its high effective tax rate, averaging 44%, and its historically low revenue growth remain key challenges.

I projected that its future growth will likely stabilize at single-digit levels, given the decline in backlog and the limited expansion in international markets.

From a valuation perspective, the company appears fairly priced with a small margin of safety. However, a higher revenue growth trajectory or a significant reduction in tax rates would create more upside potential.

I am a long-term value investor looking for a 1-foot pole to jump over. Among other things, looking for a margin of safety in Daktronics requires me to be a tax expert. I do not think that Daktronics meets my criteria.

Editor’s Note: The article is from H.C. Eu who blogs at Investing for Value. He is a self-taught value investor and has been investing in Bursa Malaysia and SGX companies for more than 20 years. His value investment experience has been enhanced by both his Board experiences and his contacts with controlling shareholders of many of Bursa Malaysia’s listed companies. These have given him a unique opportunity to be able to analyze and value companies differently from other research houses. If you enjoyed this piece, you can find similar pieces and other value investing tips in his blog.

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