Market Participants Recognise Daktronics, Inc.'s (NASDAQ:DAKT) Earnings Pushing Shares 29% Higher

Despite an already strong run, Daktronics, Inc. (NASDAQ:DAKT) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 19x, you may consider Daktronics as a stock to avoid entirely with its 30.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Daktronics hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Daktronics

Keen to find out how analysts think Daktronics' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Daktronics?

In order to justify its P/E ratio, Daktronics would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 369% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 28% over the next year. Meanwhile, the rest of the market is forecast to only expand by 15%, which is noticeably less attractive.

With this information, we can see why Daktronics is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has got Daktronics' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Daktronics maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Daktronics that you should be aware of.

Of course, you might also be able to find a better stock than Daktronics. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.