Monday, May 21, 2018

Dave & Buster's: It's All Fun And Games With Nearly 30% Upside

Casual-dining chains have not been winners during this economic expansion. Millenials, with their need for more social media-worthy experiences, have been blamed for the decline in conjunction with Baby Boomers moving onto fixed incomes as they retire.

Dave & Buster's Entertainment Inc (NASDAQ: PLAY) provides an eat, drink, play, and watch experience for consumers. This hybrid entertainment/dining experience has fared well since going public in 2012, attracting higher-income adults in the 21-39 age range. Poor same-store sales last quarter knocked the premium off the stock price, but top and bottom-line growth were still strong. Margins and efficiency ratios top its competitors, and Wall Street and quant valuation models agree that there is a strong upside for this diamond in the casual-dining rough. You'll Probably Want to Sit Down for This

Casual dining, the traditional sit-down, full-service restaurant experience is getting hit by demographics. Millennials want hip, social-media worthy experiences and retiring Baby Boomers are thrifty on their fixed incomes. Headlines such as "Millennials Are Killing Chains Like Buffalo Wild Wings And Applebee's" are not uncommon.

Overall, the food service industry has seen increasing growth over the last eight months. The chart below indicates restaurant sales have grown around 3.8 percent YoY (blue line) after bottoming out at 1.6 percent in September 2017. Employee growth sits just below 2 percent, showing that operators have not regained much confidence with the sales uptick.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: BLS, U.S. Census, FRED

Growth within the industry is a bit lumpy, with limited-service restaurants, such as Wendys Co (NASDAQ: WEN) and Chipotle Mexican Grill, Inc (NYSE: CMG), growing at 5.3 percent in 2017 as compared to 3.5 percent for casual dining establishments according to the National Restaurant Industry.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: National Restaurant Association

Restaurants are doing everything they can to make the experience better for diners. Chili's, a subsidiary of Brinker International, Inc (NYSE: EAT), reduced their menu by 50 items. Applebee's, owned by Dine Brands Global Inc (NYSE: DIN) invested in tablets for every table to give the appearance of more on-demand service. "Endless Apps" at TGIF is an example of older chains playing the value card.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Picture Credit: TGI Fridays

Meanwhile, Dave & Buster's Entertainment, Inc. (NASDAQ: PLAY) has focused on the experience side of an evening out. Over the last decade, it has flipped the share of revenue from food and games, with entertainment now responsible for 56 percent of sales and driving a more than 2x increase in EBITDA margins.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside Source: Dave & Buster's Jan. 2018 Investor Presentation

Dave & Buster's Owns It Niche

Dave & Buster's is best known for its "Eat Drink Play Watch" tagline. Its restaurants provide full-service dining, a wide variety of alcohol, the latest video games, and plenty of televisions to follow sporting events. The chain owns all of its domestic stores, 106 as of February 2018, and has increased the count by 11.2 percent annually since 2012.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: Dave & Buster's Jan. 2018 Investor Presentation

D&B features the highest sales per store in the casual-dining industry, even compared to higher-end restaurants.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: Dave & Buster's Jan. 2018 Investor Presentation

Its demographics are a bit surprising. It is less a Chuck E. Cheese and more an adult experience. D&B's target audience is 21 to 39 years-old, and it has a 58 percent to 42 percent adults to family visitor mix.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: Dave & Buster's Jan. 2018 Investor Presentation

Since Dave and Buster's went public in October 2012, it has consistently grown revenues.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

Along with this revenue growth, the company has grown its margins. Net Profit Margin sits at 10.2 percent, impressive for the food industry.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

In addition to Net Profit Margin, D&B leads its peers in managerial efficiency ratios including Return on Invested Capital, ROE, and Return on Assets.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

A well-executing management team also shows through in the restaurant chain's growth comps. It far outpaces its peers, and the Consumer Discretionary sector as a whole, with sales growth, net profit growth, and projected sales and net income growth.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

However, when it comes to a firm that is constantly opening new locations, same-store comps are an important measure. D&B features the two-year stacked metric in its latest Investor Presentation (chart below) versus Knapp-Track same-store sales estimates, which are based on a survey of 50+ casual-dining chains. With strong past performance, it is not surprising that the firm would focus on a two-year combination of same-store sales, but there are cracks starting to show. The stock has suffered after comps dropped in late 2017 and into 2018. For Q4, ended on February 4, same-store sales fell -5.9 percent, dragging the fiscal year down to -0.9 percent growth. Despite the weak comps, net income increased 34.9 percent on the quarter and 35.2 percent for the year. Management noted in the earnings call that while weather played a part, it had seen a fall-off on the entertainment side with its younger audience, and is focusing on improving the gaming experience while also offering more value opportunities with food and cocktail specials.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: Dave & Buster's Jan. 2018 Investor Presentation

Wall Street expectations remain strong for D&B. All ten analysts suggest accumulating the stock with four strong buys and six buy recommendations. Management has been doing a good job of managing expectations with four quarters of earnings surprises, but barely scraped by last quarter when everyone was caught off-guard with the weak same-store comps. Sales estimates are near double-digit for this and next year, but EPS estimates have fallen since the earnings release. Expectations are for negative EPS growth over the next quarters and years. D&B is dealing with the repercussions of strong past comps, but it is good to see that analysts have accepted a slower trajectory for the company.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finance.yahoo.com

PLAY Should Trade at a Premium But Is Now Priced to Move

Dave & Buster's has the lowest trailing P/E among its peers (pink bars). Its Forward P/E is around average for the pack, but the expectations for declining earnings does leave it as the only one to see a higher future P/E. This can be seen as a positive, as it allows for easier earnings surprises compared to its peers.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

Price/Sales show the company as averagely valued relative to its peers. Sales can be a purer comparison among firms as they are typically less engineered than earnings.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

The firm's Enterprise Value multiples also do not show relative cheapness. While D&B's EV/EBITDA is lowest among its peers, the more honest Free Cash Flow metric is around average for the chains.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

Showing D&B's relative debt load is a bit difficult due to two of its competitors featuring negative equity. Compared to Darden Restaurants, Inc. (NYSE: DRI), and the Consumer Discretionary sector's 45 percent Debt/Equity ratio (pink bars), D&B's is a bit high. However, Debt/Total Capital provides more comps and shows the chain more favorably relative to its peers. The firm has focused on reducing debt bringing it down from $486 million in 2014 to $264 million last year.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

Dave & Buster's can easily afford its current leverage. Its 22.4x Interest Coverage ratio is highest among its peers. Its Cash Flow/Total Debt was an impressive 81.9 percent in 2017 according to finbox.io.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

While the stock appears fairly priced compared to its peers, it has clearly been a better performing company with higher per-store sales, better margins, and industry-best efficiency ratios. Wall Street believes in the management team with an average target price across nine analysts pointing to 41.8 percent upside. Finbox.io's quantitative valuation model also expects positive returns from the stock, but at a more conservative move of 28.2 percent.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside
Source: finbox.io

Dave & Buster's: Outplaying the Competition for a 28 percent+ Upside

With tepid wage growth, the feared impact of Millennials, and poor results from casual-dining chains in general expect the market to take a conservative view of the group. This sets Dave & Buster's up to easily beat Wall Street's expectations if it continues its strong performance.

Its margins and efficiency ratios show that management has been out-executing its peers. The fact that the stock shows up valued similarly to these competitors, rather than at a premium, points to an opportunity to invest in a star at an average valuation. Wall Street experts agree, forecasting nearly 42 percent upside for Dave & Buster's. Acting as a check against the sometimes qualitative view of analysts, Finbox.io's quantitative valuation composite also sees upside from the restaurant chain, calling for a gain of 28.2 percent. Dave & Buster's is positioned right to allow investors to eat up some stock gains.

Author: Matt Hogan

Expertise: Valuation, financial statement analysis

Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset's fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.

His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron's, Seeking Alpha and investing.com.

Matt can be reached at matt@finbox.io.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Dave & Buster's: It's All Fun and Games With Nearly 30% Upside

Photo Credit: DaveandBusters.com

Thursday, June 18, 2015

Checklist for women who take financial decisions

He is against generalising any form of investment for any age or category of people. He prefers it being specific and personalised to each individual, be it men or women.

He advises against putting all your eggs into one basket, irrespective of how good a particular asset class might look. Based on individual profile, investment profile, time horizon and the goals, an investor needs to make an asset allocation plan wherein he or she decides how much funds will go into equities, how much into debt and how much into any other say real estate or precious stones, he says.

According to him, the idea is to make that kind of an asset allocation plan and allocate money based on that plan, and not as per the timing of the market.

Below is the verbatim transcript of Harshvardhan Roongta's interview on CNBC-TV18

Q: Do you think women are perhaps better placed to be making financial decisions and are you seeing a lot more women come to you for queries, I don't want to say anything but perhaps we are just intrinsically better organisers of finances?

A: Women otherwise are known to be better organised then men. I am not getting into comparing the habits of people but generally I would say that since women have multiple roles, they work, manage their house and office as well. So, the idea is in recent times we are seeing women coming forward to take charge of the finances.

Earlier it was all left on their husbands to do it or their parents to take charge of the finances, but recently we have seen that paradigm shift wherein women want to take charge. They are trying to take keen interest in their own finances so that they can be independent and they can take decisions on their own. So, answering your query yes we see that kind of awareness being created these days and hopefully it will only increase as days go by.

Q: Are the rules for women investing different from that of men and secondly just classifying them into three buckets say one single working women, secondly married and working and thirdly married with a family but not working. Most of the women would perhaps fall in one of these three, so what is the advice for each of them?

A: When you talk about personal finance, the requirements and what you do with your money is completely dependent on your current situation. So, if there is a woman who is single there are different goals that she has, there are different requirements that she has so there is a different thing that she does with her money.

So, similarly if there is a woman who is married without children there are different kind of set of investments and if a woman is independent and has a child as well there are different kinds of schemes for them.

So, it will be very difficult to generalise that all women who are not married need to do a particular set of things. All 35 year olds cannot have a simple and a straight forward blanket investment pattern. If a person has some liabilities in the short-term, he needs to make provisions for that vis-à-vis another person who has no liabilities in the short-term makes different set of investments. So, I would say let us not generalise any form of investment for any age or a category of people, let it be very specific and personalised to each individual, be it men or women.

Caller Q: I have some investment in public provident fund (PPF) and my trade period is approaching very soon. I want to invest that money, approximately Rs 7 lakh, in stocks like Reliance Industries ( RIL ), Hindustan Unilever ( HUL ), ITC , Tata Consultancy Services ( TCS ), Infosys , Sun Pharma , Lupin , etc. Is it worth entering maybe via mutual fund or direct equity now to get more returns?

A: The first thing would be that there is a general rule you do not put all your eggs into one basket. So, irrespective of what the market situation or what the conditions currently are you want to take benefits of the market being at lows and there is rupee depreciation. So, if you are considering these things then considering equity because of that reason I would say no, do not do that.

Understand there is a risk in every investment that you make. Like for instance in a bank fixed deposits (FD) there is a risk of inflation, though the capital is safe there is a risk of inflation. In equities there is a risk of capital, but inflation risk is taken care of. So, the idea is irrespective of however good a particular asset class looks at any given point in time you do not put all your eggs into one basket.

Based on each individuals profile, the investment profile, time horizon and the goals you need to make an asset allocation plan wherein you decide how much funds will go into equities, how much into debt, how much into any other say real estate or precious stones.

So, the idea is you need to make that kind of an asset allocation plan for yourself and allocate money based on that plan not as per timing of the market. So, I would suggest if you can take high risk you may chose to allocate more into equity, but not everything into equity. So, answering your query, no I would not suggest that you shift from PPF only because market conditions are favouring equities. You make an asset allocation plan and divide your money and invest accordingly.

Q: Is there a thumb rule on diversification because the caller has her money in fixed deposits, how much of that portfolio should she shift into equity?

A: First parameter of choosing an asset allocation plan, one of the primary factors is age, the other is goals. If a person is young but if she requires the money after two years then she certainly cannot invest into equities irrespective of age being on her side. So, general thumb rule then whatever is her age that much money gets invested into debt. Therefore, whatever her age is, probably that much could be in debt and the rest could be in equities provided she has no short-term requirements with those funds.

Caller Q: Which mutual fund should I invest in?

A: Mutual fund has schemes which suit all types of investors. So, what you have referred to is an asset class which is equity. So, there are different kinds of schemes in equities such as you have funds which invest only into large cap companies, some will invest into mid caps, a combination of them. There are some sector funds which invest only in a particular sector such as banking or pharmaceutical or technology. So, within the equity category there are different kinds of options available within debt - there are investments, there are schemes which allow investors to invest money for couple of days and going up to couple of years.

I do not want to throw up names to you. I want to throw up categories and one of the safest ways to invest into equities is to begin with index funds. So, in case you do not have an index fund in your portfolio, you can choose to invest in an index fund or if you want to start investing into equities again then there is another option available which is a balanced fund, a part of the money that you give, goes into debt and a part into equities. So, to begin with these are the options available.

As you progress into investing and you get comfortable with equity investing, you can choose schemes which are actively managed; you can choose a large cap fund and then going down a midcap and a small cap and then last would be sector fund. So, if you wish to know names in equity schemes then Franklin India Index Fund is one fund you can start with or you can start with an equity aggressive balanced fund, which is in HDFC Prudence Fund and if you want debt aggressive balanced fund then HDFC Monthly Income Plan (MIP) would be a scheme to start with.