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No. of Recommendations: 4
Well DAKT got smacked down in after-hours trading yesterday after the announcement of their downward revisions for the Fourth Quarter of 2007. I think the timing, with the markets closed today for Good Friday was unfortunate, and may have contributed to the paniced reaction (down about 5 points from the daily closing price). The market seemed to totally discount the fact that the company suggested that 2008 would track roughly in line with previous forecasts. Anyone have any thoughts about how DAKT is likely to trade over the next few months? I think (hope) that last night saw the worst of the short term downside to the stock and might consider buying some more shares in the event that any further significant downturn should occur.

I think we should consider the possibility that the market isn't done discounting DAKT's revised guidance yet. They really hosed down their forecast for Q4FY07. Revenues will come in between $101M and $105M vs. previous guidance of $106-118M. EPS is expected to be between $.06 and $.10 vs. $.12 to $.19. See the release here http://tinyurl.com/yt3b53

The following is not meant to bash DAKT. I like the company, their management, and the business in which they operate. But I don't think they're cheap; even after the 15% whacking they took in after hours trading. Disclaimer: I sold all my DAKT in 3 lots last April at between $19 and $21 because I thought they were overpriced then.

So are they overpriced today? I assumed FY07 revenues of $425M ($322 from Q1-3 plus $103M from revised Q4 guidance). I was kind and assigned an operating margin of 9.8% based on the average of the last 5 years. I say kind because on the conference call management admitted that SG&A expenses are currently way too high and that improving operating margins going forward will be their primary focus and also because the drastically lower Q4 EPS guidance suggests that said margins are currently in the toilet. I'm betting that when the 10-K comes out we'll see op margin well under 9.8%, but I'll cut them a break until I see the actual numbers. This implies FY07 operating income of $42M. Current EV is $942M – 39.34M shares at $23.49 plus $21M of debt less $3M cash (as of Q3). So you're paying 22x op income for a company that's hoping to grow order bookings between 15 and 25% in the upcoming year with sales growth expected to be <15% due to revenue recognition timing.

Other headwinds facing DAKT include servicing the $19M of new debt and bringing the new facilities ($81M in capex in the first 3 quarters alone!) up to speed.

I think the current price is still too generous. I'll be remaining on the sidelines on this one, but if I could get DAKT for 15-17x operating income I'd be really tempted.

Regards,
Tom
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