Playing games, watching sports, eating food and drinking beverages are some of our favorite things to do on a Friday night.
On a Friday night? Who are we kidding? It's our favorite thing to do every night. After financial analysis on Christmas Eve, of course. Anyway, this short article is about Dave & Buster's Entertainment Inc (NASDAQ:PLAY), an exciting new IPO that has investors excited. Dave & Busters is a restaurant chain in which customers eat a sandwich (or a steak) and then play an arcade game (or watch the game).
Dave & Buster's seems to have it all: games, sports, food, and drinks. And it looks totally awesome.
Source: Company Filings
Yet, despite our love of playing games, watching sports, having fun, eating food, and drinking drinks, we're not totally on board with Dave & Buster's IPO. In our opinion, PLAY's current valuation and returns pale in comparison to its much more profitable, proven peers in the restaurant industry. And so it is with a heavy heart, and against the immortal words of ABBA, that we're just not willing to "take a chance" on PLAY.
Compared to its peers in the Restaurant industry, PLAY costs more and offers less on almost all measures we looked at (as of December 23, 2014 according to Gurufocus).
Source: Gurufocus and Author Compilation
Some points of note (all numbers from Gurufocus unless otherwise stated):
P/E. Dave & Buster's P/E ratio is high at 59.1. That means investors are willing to pay over $59 for $1 of PLAY's earnings--for a new company with little track record for creating value for shareholders. PLAY's P/E is not only higher than the companies we compared it to, above--PLAY's P/E is ranked higher than 65% of its peers in the Restaurants industry (industry median: 35.30).
EV/EBIT. At 28.79, PLAY has the highest EV/EBIT of the companies we looked at. This EV/EBIT ratio implies an operational earnings yield of a low 3.14%. PLAY's EV/EBIT is worse than 64% of its peers in the Restaurants industry (industry median: 21.73).
PLAY has no dividend. The Restaurants industry has an average dividend of 2.0%, according to Morningstar.
The ROA median in the Restaurants industry is an already low 4.39. PLAY manages to underperform that, too, with a current ROA of -0.78%--implying that PLAY's assets would be better off in even a low-interest savings account.
PLAY's ROE is even worse, accounting for its large debt: -3.88. Again, the capital employed by this business would make a greater return in a savings account (~1.3%). Return on Equity at Dave & Buster's Entertainment Inc is ranked lower than 51% of its peers in the Restaurants industry. (PLAY's ROE is much lower than the Restaurants industry median of 10.23.)
PLAY's operating margin isn't the worst, at 8.5, but it's nothing to write home about.
On the other hand, PLAY's net margin, at -1.3, is the worst of the companies we looked at. It's also worse than 52% of its peers in the Restaurants industry (industry median: 3.66)
PLAY has the worst debt to equity at 323%(!)
- PLAY's interest coverage is thin, and ranks lower than 56% of its peers in the Restaurants industry (industry median: 17.02).
Now, it's true that Dave & Busters is planning on expanding--for example, by opening many more restaurants. Yet, we're not impressed so far with its expansion track record.
- For instance, PLAY has a lot of goodwill on its balance sheet. Goodwill arises when one company pays more than the market value of an acquired company's assets. Goodwill is risky for shareholders because it doesn't necessarily represent an "asset" in the meaningful sense of the word. The implication is that the balance sheet is less firm than it appears on first blush. It's not a good sign that goodwill makes up a huge percentage of PLAY's total assets.
Source: Company Filings and Author Compilation
In fact, this company has more goodwill than it has shareholders' equity.
Source: Gurufocus and Author's Analysis
Next, we like it when expanding companies can convert growing revenue into net income. Otherwise, why bother growing?
Source: Company Filings
Unfortunately, PLAY doesn't seem to be converting its hard-earned revenue growth into net income growth--which has been unacceptably low for many years.
- PLAY, too, is failing to fund its investment with cash, and needs to issue more and more debt.
- Its interest coverage is also thin: PLAY pays $1 of interest on every $1.11 of EBIT. Not good.
Dave & Buster's looks like a fun restaurant. After all, who doesn't like (1) eating food, (2) drinking drinks, (3) playing games, (4) watching sports, and (5) having fun? Nevertheless, we advise investors to give it a wide berth, and instead choose one of its less-exciting, proven-profitable peers.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.