Key insights
- The author argues that Dave & Buster's ($PLAY) is undervalued due to an overreaction in the restaurant industry. They highlight the company's debt structure, asset value, and stable gross margins as reasons for potential equity upside. The author believes any business improvement could significantly increase the stock price, presenting a bullish outlook.
The restaurant industry stocks have been annihilated for reasons we all know. Dave & Buster's looks completely over done to me. The market cap/EV ratio is 0.1. This means 90% of the company value is the debt. Investors are valuing the equity at basically zero. Does this make any sense?
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Half the debt is long term leases. This improves the situation materially because rent obligations have no recourse to assets, just cash flow. Rental space can be sublet.
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Net fixed assets on the balance sheet equals debt+leases. I would never claim the market value of the fixed assets = the book value but there is a lot of room here between the assets and the debt stack.
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All of the debt is bank loans. When you owe the bank $100, it's your problem. When you owe the bank $1B, it's the bank's problem. No bank would push PLAY into Chapter 11. The loans will be renegotiated at higher rates with more covenants but the situation is nowhere close to wiping out the equity.
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Gross margin has been stable. This is not about a broken business model. Operating expenses need to be adjusted, certainly.
If you look ay WEN or BLMN or CMG, none of them have seen the mkt cap/EV ratio collapse like this.
Any business improvement at PLAY will send the equity value soaring. It won't take much.