Investors have recently witnessed a notable 10.31% daily gain in Dave & Buster's Entertainment Inc (PLAY, Financial), alongside an impressive 33.14% gain over the past three months. With an Earnings Per Share (EPS) of 2.8, the critical question arises: is PLAY fairly valued? This article embarks on a valuation analysis to address this inquiry, inviting readers to delve into the subsequent financial dissection.
Company Overview
Dave & Buster's Entertainment Inc (PLAY, Financial) operates nearly a hundred entertainment and dining venues across the United States, offering a unique blend of food, drinks, games, and sports viewing experiences. The company's revenue streams are diversified, with over half deriving from its play division, which includes amusement, simulation, and video games. The remaining revenue comes from food and beverage, with a significant portion attributed to alcoholic drinks. Currently, with a stock price of $68.29 and a GF Value of $75.03, PLAY's market capitalization stands at $2.70 billion, indicating the stock is fairly valued. This preliminary analysis sets the stage for an in-depth look at the company's intrinsic valuation.
Understanding GF Value
The GF Value is a proprietary metric that represents the intrinsic value of a stock, factoring in historical trading multiples, a GuruFocus adjustment for past performance and growth, and future business performance projections. It suggests an ideal fair trading value for the stock, with the GF Value Line serving as a benchmark. Should the stock's price significantly exceed this line, it may be overvalued, potentially leading to poor future returns. Conversely, a price well below the line could indicate undervaluation and the prospect of higher returns. Dave & Buster's Entertainment's current stock price places it in the realm of fair valuation, suggesting that its long-term return could align closely with its business growth rate.
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Financial Strength Analysis
Investing in companies with weak financial strength may lead to a permanent loss of capital. Key indicators such as the cash-to-debt ratio and interest coverage can provide insights into a company's financial robustness. Dave & Buster's Entertainment's cash-to-debt ratio is a concerning 0.01, ranking lower than 96.33% of its peers in the Media - Diversified industry. This low ranking reflects a financial strength score of 3 out of 10, signaling poor financial health for the company.
Profitability and Growth Prospects
Companies that consistently turn a profit, particularly those with high profit margins, are typically safer investment choices. Dave & Buster's Entertainment has maintained profitability for 9 out of the past 10 years, with a revenue of $2.20 billion and an Earnings Per Share (EPS) of $2.8 over the last twelve months. Its operating margin of 14.74% is commendable, surpassing 81.84% of competitors. Despite this, the company's growth, as measured by the 3-year average annual revenue growth rate of 70.9%, falls short when compared to industry standards.
ROIC vs. WACC
Evaluating a company's profitability can also be done by comparing its Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). A higher ROIC than WACC indicates value creation for shareholders. Dave & Buster's Entertainment's ROIC over the past year was 6.67, while its WACC was higher at 8.72, suggesting the company may not be generating sufficient returns on its investments.
Conclusion
In conclusion, Dave & Buster's Entertainment (PLAY, Financial) appears to be fairly valued considering the current market conditions. However, investors should be cautious due to the company's weak financial strength and only fair profitability. Its growth also lags behind more than half of the companies in its industry. For a more detailed financial overview, interested parties can explore Dave & Buster's Entertainment's 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
