Dialight at the end of the tunnel
Posted on April 30, 2009 by Richard Beddard
Filed Under Companies, Markets |
<blink>Buy me</blink>
Dialight’s chart reminds me of our politicians, huffing and puffing, but not achieving much. The price now, adjusted for splits and consolidations, is pretty much what it was back in 1994, as far back as Sharescope shows, though it’s also returned money to investors.
Judging by the numbers, Dialight is flashing a great big LED powered billboard saying “Buy me”.
Dialight makes the LEDs that could light up such a billboard as well as the flashing indicators on electronics equipment like modems, signal lights (like traffic lights, warning lights on tall buildings, and brake lights on buses), LED lighting for heavy industry and street lights.
Since LEDs use less electricity than conventional lighting, require less maintenance, last longer, and emit whiter light I’m surprised the shares haven’t received more attention over the years, although their green credentials might be part of the reason for the surge in the price from little more than 60p in 2003 to £3.00 in 2006.
As new and hi-tech as it sounds, though, Dialight’s been in the indicator business since the late 1930’s and manufacturing LED’s since the late 1960’s. Perhaps the enthusiasm a few years ago shows what can happen to shares in a prosaic manufacturing company when it’s product captures investors’ imaginations.
Dialight (DIA) hasn’t yet turned potential into growth though. Since 2002, the company has consistently earned about 10p a share but the long-term price earnings ratio of eight includes three years, 1999 to 2001, when it earned two or three times that much a year. Assuming the last seven years are more typical, Dialight’s price earnings ratio is a slightly more pricey 11.
The picture is complicated by Dialights relaunch in 2005 after a series of disposals. Before then it was Roxboro, and Dialight was the smaller part of a business also manufacturing electronic measuring devices.
Taking its record of earnings as a guide to future profits is a bit speculative because the business has changed, but I think its still relevant. The average of the past three years of LED earnings, also gives a PE of eleven, and as regular readers know, eleven is teetering on the edge of bargain territory as far as I’m concerned.
Going into recession, Dialight’s finances seem to be in good shape. It’s F_Score, a measure of financial strength, is eight out of a possible nine, reflecting improving profitability (boosted in part by the week pound), and no bank debt.
Looking to the future, since, 60% of North American road-traffic signals are already converted to LEDs and 70% of US transit buses use Dialight brake and turn signals, its possible that the surge in LED adoption is ending, at least in some areas, but Dialight’s strategy is to find new niches it can exploit profitably, like street lights where LEDs have made less impact, as well as the older niches it services.
Initiatives to combat climate change and reduce energy consumption might encourage use of Dialight LEDs, but to my mind, speculation about the future is secondary to the basic facts; Dialight appears to be a profitable well financed company, with a worthwhile product whose shares trade at a reasonably cheap price on the stockmarket.
Recession means uncertainty, particularly in demand for LED electronics components, but, since the basics are in place, the profits will probably follow.
Incidentally, there’s a page in the annual report I think more companies should adopt. It’s a table with three columns: Our strategy, what we said, and our performance in 2008.
In theory:
‘O’ is for overpriced.
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…And academics can spot the anomalies too. CXO Advisory Group reports that Craig Nicholson and M. D. Beneish have devised an O-Score, ‘O’ standing for ‘overpriced’. Companies that scored 0 out of 5 according to their measure earned abnormal returns of 4.5% over the next year. Companies that scored 5 out of 5, they were overpriced, earned dramatically negative abnormal returns of -26.9%.
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Bolton’s bullish, the FT’s sceptical.
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