Dallas, tex.-based Dave & Buster’s Entertainment, Inc. (PLAY) reported strong third-quarter earnings on December 8. While its $317.98 million in revenue for the quarter missed the consensus estimate by 0.6%, its $0.21 in adjusted earnings per share beat estimates by 62.8%. Also, its board of directors recently authorized a $100 million share repurchase program. However, the company stated that its fourth-quarter revenues would be affected by its weak Special Events business relative to 2019 and a calendar shift in its significant holiday periods.

PLAY recently witnessed a decline in hedge fund sentiment. And the stock has lost 10.1% in price over the past month and 24.4% over the past nine months to close yesterday’s trading session at $34.37. PLAY is currently trading 33.6% below its 52-week high of $51.73, which it hit on March 26, 2021.

Furthermore, the COVID-19 omicron variant, labor and supply shortages, and rising input costs make its near-term prospects look uncertain.

Here is what could influence PLAY’s performance in the coming months:

Solid Financials

For the fiscal third quarter, ended October 31, 2021, PLAY’s revenue grew 191.6% year-over-year to $318 million. The company’s adjusted EBITDA for the quarter came in at $68.20 million, versus a $16 million loss in the previous year’s quarter. Its net income was  $10.60 million, versus a loss of $48 million in the prior-year period. And its  EPS came in at $0.21, compared to a $1.01 loss per share in the year-ago period.

Favorable Analyst Estimates

Analysts expect PLAY’s revenue to increase 215% in the current quarter and 204.5% in the current year. In addition, its EPS is expected to increase 152.1% in the current quarter and 148.6% in the current year. Also, Wall Street analysts expect the stock to hit $50.43 in the near term, which indicates a potential 41.3% upside..

Stretched Valuation

In terms of forward P/B, PLAY’s 7.72x is 113.1% higher than the industry average of 3.62x. Likewise, its forward EV/S of 2.60x is 76.2% higher than the industry average of 1.47x. Moreover, the stock’s forward EV/EBIT and P/S of 18x and 1.25x are higher than the industry averages of 13.52x and 1.20x, respectively.

Low Profitability

In terms of trailing-12-month net income margin, PLAY’s 2.43% is 63% lower than the 6.56% industry average. And its 2.66% trailing-12-month ROTC is 64.8% lower than the 7.56% industry average. Moreover, the stock’s 1.11%  trailing-12-month ROTA is 81.3% lower than the 5.96% industry average.

POWR Ratings Do not Indicate Enough Upside

PLAY has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PLAY has a D grade for Stability, consistent with its 1.97  beta.          

The stock has a C grade for Momentum, which is consistent with its 22% loss over the past nine months and 4% decline over the past six months. In addition, PLAY has a C grade for Quality, which is in sync with its lower-than-industry profitability ratios.

PLAY is ranked #28  of 46 stocks in the Restaurants industry. Click here to access PLAY’s ratings for Sentiment, Growth, and Value.

Bottom Line

PLAY is currently trading below its 50-day and 200-day moving averages of $37.07 and $39.65, respectively, indicating a downtrend. So, the stock looks overvalued at the current price level, and we think it could be wise to wait for a better entry point.

How Does Dave & Buster’s (PLAY) Stack Up Against its Peers?

While PLAY has an overall POWR Rating of C, one might want to consider investing in the following Restaurants stocks with an A (Strong Buy) or B (Buy) rating: Good Times Restaurants Inc. (GTIM), RCI Hospitality Holdings, Inc. (RICK), and Nathan’s Famous, Inc. (NATH).

PLAY shares were trading at $35.85 per share on Tuesday morning, up $0.16 (+0.45%). Year-to-date, PLAY has gained 19.42%, versus a 25.39% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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