- Digital signage market is expected to grow during the next few years.
- Planar’s transition toward digital signage bodes well for the company.
- Planar is a buy with ~50% upside.
Incorporated in 1983, Planar Systems (PLNR, Financial) has been developing and offering display solutions to the market. Its product portfolio includes digital signage solutions, 4K LCD displays, touch displays, desktop and touch screen displays, etc. The company's display solutions are being utilized by government agencies, educational institutions, retailers and many other businesses. Some of its customers include Nike (NKE), Google (GOOG) and Microsoft (MSFT). The company has been concentrating on catering to the demand of the signage display market. Its display solutions are being used at airports, sport arenas and control rooms. Headquartered in Oregon with subsidiaries located in France, Italy, China and Taiwan, the company holds around 32 patents and markets its products under the brand name of Planar, Clarity (Subsidiary) and Runco.
Revenue
Planar Systems' products can be categorized into two main types: Digital Signage Products, and Commercial and Industrial Products. Historically, industrial products including desktop monitors, rear projection cubes, and custom commercial and industrial displays were the primary revenue source of Planar Systems. However, the company generated around 47% of its revenue from digital signage products in 2014.
Source: SEC filings
Geographically, the company has been generating the majority of its revenue from U.S. customers. In 2014, 76.5% of the company's revenue came from sales to the domestic market while 23.5% of the revenue was from international customers.
During 2014, the company experienced a fall in its revenue from commercial and industrial sales, which was mainly due to lower sales of home theatre displays, touch monitors and the closure of Electroluminescent product line. But, the company recorded an increase of 7.8% in the total revenue amid increase in the sales volume of signage display products. To review, the company has been shifting its focus towards digital signage to offset the slowdown of industrial products.
Industry Prospects
Planar Systems has been making a transition from the commercial and industrial display market to the digital signage market. As mentioned above, 47% of company's total revenue is generated by the signage display market during 2014. It has been predicted by analysts from MarketsandMarkets that the digital signage industry will grow from $14.63 billion in 2014 to $23.76 billion in 2020. With a CAGR of 8.18%, majority of the market share will belong to the United States
Source: MarketsandMarkets
IHS analysts expect an increase of 7.3% and 7.8% in the digital signage display market during 2015 and 2016. These growth rates will be supported by increases in sales of digital signage bundles to SMBs, market for video wall applications and increase in the demand for outdoor digital signage.
A research report from grand view research anticipates a CAGR of 6.1% during 2014-2020 and further predicts significant growth of digital signage demand in retail, education and transportation sectors.
Source: Grand View Research
TechNavio's analysts believe that the market for "Video Wall Displays" will experience a CAGR of 19.18% from 2014 to 2019 while IHS predicts that the market for 4K LCD displays will experience a year over year 94% growth. The growth of video wall displays bodes well for Planar as the company generates significant amount of revenue from tiled LCD systems. According to IHS:
"Since its market introduction in 2013, TV brands have recognized that 4K is a great way to enhance value, so they have strongly promoted 4K models"
The market for 4K displays stood at roughly $9.2 billion as of year ended 2014, and it is expected to reach approximately $18 billion in 2015. Planar is set to capitalize on the above mentioned growth prospects of the industry amid its exposure to the digital signage market.
Thesis
Our bullish view on Planar Systems is based on the following thesis:
New products and innovation may boost year end revenues. A key driver of a company's growth in the long run is its ability to innovate that will satisfy customer needs. Since the start of the fiscal year 2015, Planar has been introducing new products into the market. The company announced the availability of a 98-inch 4K touch display in December 2014. This will be the industry's first ever largest 4K touch display, which gives Planar the first mover's advantage before the competition intensifies.
In May 2015, the company announced an online tool, LED video wall calculator, through which the customers can design their own video walls for their own environment. This will improve the company's interactivity with its client allowing the management to ensure their solutions give a better video wall experience than the counterparts. It will further aid them in anticipating and fulfilling future needs of the customers.
"Our clients love it because it allows them to see their video wall in advance of their purchase, and we love it because it expedites the design and sale process."
In February 2015, the company announced an iOS application allowing users to manage different functionalities of Planar's UltraRes series remotely. The application provides ease of access to users without any additional costs adding tremendous value to Planar's UltraRes series.
Planar is more focused on the signage display market: Over the past couple of years, the portion of total revenue relating to signage display products has been increasing and the company's announcement of new products in this segment has the potential to increase this proportion even more by the end of fiscal year 2015.
Considering the level of growth predicted by research firms regarding the signage display industry, we believe the company will be in a favorable position of getting the most out of these predicted growth trends. Even if the company maintains a 1:1 sales ratio between its two segments of products, half of Planar's total revenue will be positively influenced by the increased demand in the digital signage industry. It is worth mentioning that digital signage market is a higher growth and a higher margin market in contrast to the commercial and industrial markets served by Planar. The company is planning to increase its signage revenue share to 75% (pdf) in coming years. All in all, Planar's bottom line will get a boost from favorable product mix going forward.
Topline growth is expected during 2015. Planar's management expects a total revenue figure between $196 million and $202 million representing a growth rate between 9% and 13%. The company has already demonstrated tremendous year over year improvement in the first half of 2015. Total revenue grew by 28% while the net profit margin increased by 3.4%. Growth was supported by digital signage revenue, which grew 57% y/y during the first quarter of 2015. The point is that Planar is already witnessing strong growth, thanks to its digital signage exposure.
Planar has blue chip customer base and award winning products. Planar is a leading (pdf) digital signage company. Customers of the company include big players like Google, Microsoft, Marriot (MAR) and AT&T (T). Further, Planar's products have been consistently receiving quality acknowledgements. Digital Signage magazine recently awarded the best 4K display device and best new display device award to Planar's UltraRes 4K LCD and Clarity Matrix respectively. In 2014, Planar's EP series won the 2014 excite award. Overall, strong customer base and quality products of the company indicate Planar's leadership in highly growing digital signage market.
To review, Planar is among the leaders in digital signage offering quality products that are acknowledged frequently. The company is exposed to the high growth market of digital signage. Revenue mix is following a favorable trend amid Planar's focus on digital signage. Recent financial results depict that Planar is benefiting from digital signage growth. Overall, our thesis points towards positive earnings growth for Planar Systems going forward. From a valuation perspective, Planar also seems a cheap proposition.
Valuation
Planar is rather cheaply priced as indicated by the forward multiple. The stock is trading around 9.42 times 2016 consensus earnings. This equates to a sub-1 PEG as earnings are expected to grow at 20% p.a. during the next five years.
Let's value the company using a PE based approach. Assumptions include 20% earnings growth during 2015-2020. A multiplier of 14 is used; industry average multiplier stands at 14.9. For discounted PE, a discount factor of 8.22% is calculated as follows:
Focus Equity Estimates
The valuation depicts that if the company manages to meet analyst expectation during 2016, the stock is worth 25% more than its current valuation. Given strong growth in digital signage revenue of PLNR, the company is set to beat analyst expectations going forward.
An EVA based approach to valuation follows:
Focus Equity Estimates
Economic profit approach to valuation reveals 49.5% upside with realistic assumptions. 20% p.a. growth is assumed in earnings during next five years, and zero growth is assumed in perpetuity.
Given Planar's exposure to the growth of digital signage, innovative product portfolio, favorable revenue mix, blue chip customer base and cheap relative valuation, we rate Planar Systems a strong buy.
