Investors seem satisfied Dave & Buster Entertainment (NASDAQ: PLAY) as its measures rebound from their lows of a year ago when the COVID-19 pandemic and drastic government lockdowns and closures were in full swing. The restaurant chain saw a positive jump of around 36% in its share price in 2021 and more than 151% in the past 12 months.
Yet he still lags behind his financial situation in 2019, when his share price in June was very similar to today, while heavily diluting his shares and taking on more debt. Its stock price seems difficult to justify at this time, and investors should be careful about buying the company at current prices, with two major reasons to consider:
1. It works better, but only compared to a trough
It’s the contrast to the dark days of America’s first COVID-19 pandemic that makes Dave & Buster’s first quarter results shine. Revenue of $ 265.3 million was up 66% year-on-year from the anemic $ 159.8 million in 2020, while ultimately a net profit of 19.6 million dollars generated adjusted earnings per share (EPS) of $ 0.40, well above the loss of $ 1.37 per share in the first quarter of 2020 (adjusted).
Both measures exceeded consensus estimates from Wall Street analysts. EPS generated a positive surprise that was 700% above analysts’ average expectation, while revenues generated a more modest positive surprise of 3.1%. These numbers show that the company is rebounding faster than analysts thought likely, helping to explain its market rise.
While the recovery shows that Dave & Buster has successfully weathered the pandemic, it still has not hit its 2019 performance level. Looking at the first quarter of 2019, over 24 months ago, revenue Quarterly was $ 363.6 million, while adjusted EPS was $ 1.13 per share. Comparing 2021 to the pre-pandemic year of 2019, Dave & Buster’s revenue fell 27%, while EPS plunged 64.6%. CEO Brian Jenkins said the results are “another highlight in our post-Covid sales recovery,” but they are still well below the company’s past performance.
Looking ahead, CFO Scott Bowman said “we expect total second quarter revenue to be between $ 335 million and $ 350 million, which is comparable to 2019” on the earnings conference call. of the first trimester on June 10. The company’s market valuation appears to forecast significant growth through the end of 2021.
2. Dave & Buster’s sold a lot of stock
In addition to selling almost at their 2019 prices, one of the hallmarks of Dave & Buster’s stocks in 2021 is that they are much more plentiful. At the end of fiscal 2019, the company had 34.1 million shares outstanding. The buybacks had reduced the number of shares outstanding from 40 million in 2018, adding value for shareholders. During the year, the stock value per share ranged from about $ 37 to $ 59.
Now, after additional share issuances made to raise funds during the period when the US government collapsed the retail economy in response to the coronavirus, 48.2 million shares of Dave & Buster are outstanding. . The company has increased its outstanding shares by more than 41.3% since 2019, diluting existing holdings, and yet has been trading in the $ 41 to $ 46 range for several months, well within the 2019 price range.
The company also added about $ 110 million in long-term net debt to its balance sheet. Obtaining this new debt, including bond issuance, during the COVID-19 crisis added to the company’s “war chest” but forced it to accept higher interest rates. , increasing its interest payments from around 4.04% to 9.42%.
Solid gains or market excitement?
Dave & Buster’s recovery from their COVID-19 troughs is undoubtedly swift and impressive, and the company appears to be at low risk of bankruptcy. However, it hasn’t even reverted to its top and bottom pre-pandemic results, but the market is staring at it like it’s performing exactly like it was in 2019. And that doesn’t even take into account the steep dilution of stocks that occurred in between.
In fact, it could be argued, from a purely rational shareholder perspective, that share prices equal to 2019 could only be justified by 41.3% growth beyond revenue metrics. and earnings (EPS) of 2019, to offset the 41.3% increase in shares outstanding and the corresponding dilution. While valuing stocks is more complex than a direct 1-to-1 match between changes in outstanding stocks and changes in income, the comparison highlights how the market values the company’s stock equal to a period in its history when it performed better than it is today, with far fewer shares outstanding.
The combination of lower performance, significantly higher number of shares and the resulting dilution, and higher and more expensive debt on his balance sheet causes Dave’s current share price to & Buster appears overvalued by post-pandemic stock market exuberance, with perhaps a burst of inflation. Those investing in entertainment or restaurant stocks may want to bypass that stock for now, either waiting for a lower entry point or investing in some of the many other quality stocks that are seeing big gains now.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.