It doesn't take long for a market darling to get heaved into the pile of Wall Street discards. Dave & Buster's Entertainment (NASDAQ: PLAY) was the toast of the the restaurant industry a few months ago for bucking the sector's dismaying trends, but now it's close to revisiting last month's 52-week lows. Shares of the big-box purveyor of food and fun have plunged 37% since peaking last June, a contrast to the otherwise buoyant market.
The latest Wall Street pro to temper his enthusiasm on the stock is Jake Bartlett at SunTrust. He's lowering his price target from $87 to $70 on Thursday, concerned about cannibalization as Dave & Buster's opens stores closer to existing locations. He argues that the chain expects to open five new entertainment centers within 20 miles of units already in the comp base, a potential drag to same-store sales. He also points out that several large direct competitors are opening locations near existing centers.
The silver lining in Bartlett's update is that the new price target of $70 represents more than 50% of upside from current levels. The bad news is that he lowered his price goal from $95 to $87 just two months ago, so it's anyone's guess as to when this game of limbo will end. Things still don't have to end badly for the chain. Let's go over a few things that can get the stock moving higher again in 2018.
1. Guidance can't disappoint again
Dave & Buster's reports quarterly results later this month, and it can't repeat the hosing down it had to do shortly after its third-quarter announcement. The stock took a big hit in early January, when the chain warned that comps were clocking in with a decline of 5.1% with just a few weeks left in the fiscal fourth quarter. It lowered the midpoint of its revenue growth guidance for the period from 17.2% to 12.9%, as brisk expansion would be held back by store-level performance. It also lowered its bottom-line outlook.
The good news here is that a rough fourth quarter is already priced into the stock. We know that this will be Dave & Buster's second straight quarter of negative comps. The key in the report when it goes out in a couple of weeks is if it sees trends improving in fiscal 2018.
2. The stock can gain steam as a buyout candidate
Things usually are pretty bad if we're talking about stocks as acquisition targets, but there is an argument to be made about Dave & Buster's getting cleaned up by a private equity firm where its progress isn't dissected publicly with every passing quarter. It's happened to Dave & Buster's before.
Bartlett -- back in January when he had a rosier outlook on the stock -- suggested that a private equity firm could pay a 33% premium on the stock and still earn a 20% internal rate of return on the investment. The stock was trading slightly higher than it is right now. Bartlett stressed that there is no indication that a buyout was in the works, but if Dave & Buster's were to tap a firm to explore strategic alternatives, it could lift the shares as the company puts itself into play.
3. Valuation arguments and earnings surprises
Dave & Buster's stock has fallen sharply. Earnings growth has slowed -- and is expected to be negative in the upcoming fourth-quarter report -- but the shares have slumped more than its fundamentals. The cascading share price finds Dave & Buster's trading at an earnings multiple in the high teens, a compelling valuation if it's able to turn things around or at the very least bottom out here.
Dave & Buster's is fetching 18 times this new fiscal year's projected earnings and 16 times next year's target. Those forecasts have historically proven conservative, as Dave & Buster's is on a 13-quarter streak of beating Wall Street profit expectations. If it can keep that going without issuing problematic guidance, it's easy to see value investors coming in to pick up the stock that growth investors have left behind.
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