key insight
- The estimated fair value of Dave & Buster’s Entertainment is US$43.37 based on two-stage free cash flow into the stock.
- With a stock price of US$41.26, Dave & Buster’s Entertainment appears to be trading close to its estimated fair value.
- US$52.88 analyst price target for PLAY 22% higher than estimated fair value
Today, Dave & Buster’s Entertainment, Inc. (Nasdaq: Play) as an investment opportunity by projecting future cash flows and discounting them to today’s value. We will use the discounted cash flow (DCF) model. Don’t let the jargon fool you. The math behind it is actually pretty simple.
It is worth pointing out that the DCF is not perfect for all situations, as companies may be assessed in different ways. If you want to learn more about discounted cash flow, you can read more about the rationale behind this calculation. simply the Wall St analytical model.
Check out the latest analysis from Dave & Buster’s Entertainment.
Calculation step by step
As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is generally a period of high growth that levels off towards the closing price captured in the second “steady growth” period. First, you need to estimate your cash flow over the next 10 years. We use analyst estimates when available, but if these are not available, we extrapolate previous free cash flow (FCF) from previous estimates or reported values. Over this period, we expect companies with shrinking free cash flow to contract at a slower rate, and those with growing free cash flow to see slower growth. This is to reflect that growth tends to slow in the early years rather than in later years.
DCF is based on the idea that future dollars are worth less than current dollars, so the sum of these future cash flows must be discounted to arrive at a present value estimate.
10-Year Free Cash Flow (FCF) Estimate
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
| Leverage FCF ($, million) | $144.6 million | $150.9 million | US$194 million | $243 million | US$255 million | $266 million | $274.9 million | $283 million | $290.7 million | $297.9 million |
| growth rate source | 5 analysts | 5 analysts | Analyst x 1 | Analyst x 1 | Analyst x 1 | Analyst x 1 | Est @ 3.34% | estimated @ 2.96% | Est @ 2.69% | estimated @ 2.51% |
| Present Value ($, Millions) Discount @ 13% | $128 | $119 | $136 | $151 | $141 | $130 | $119 | $109 | 99.4 USD | 90.5 USD |
(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = US$1.2 billion
After calculating the present value of the future cash flows for the first 10 years, we need to calculate the terminal value. This takes into account all future cash flows after the first stage. We use the Gordon-Growth formula to calculate the terminal value at a future annual growth rate equal to the 5-year average 2.1% of the 10-year Treasury yield. Discount the final cash flows to their present value at the 13% cost of equity capital.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$298 million × (1 + 2.1%) ÷ (13%– 2.1%) = US$2.9 billion
Present Value of Terminal Value (PVTV)= television / (1 + r)Ten= US$2.9 billion ÷ ( 1 + 13%)Ten= $872 million
The total value, or equity value, is the sum of the present value of the future cash flows, in this case US$2.1 billion. Divide this by the total number of outstanding shares to get the intrinsic value per share. Compared to the current share price of US$41.3, the company’s fair value appears to be 4.9% cheaper than the current share price. However, evaluation is an imprecise tool, like a telescope. Move a few degrees and you’ll end up in another galaxy. Remember this.
important premise
The most important input to discounted cash flows is the discount rate and, of course, the actual cash flows. You do not have to consent to these inputs. I encourage you to redo the calculations yourself and play with them. The DCF also does not give a complete picture of a company’s potential performance, as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering Dave & Buster’s Entertainment as a potential shareholder, the cost of capital is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for the liability. For this calculation we used 13% based on a leverage beta of 1.783. Beta is a measure of a stock’s volatility relative to the market as a whole. Our betas are derived from industry average betas of globally comparable companies and are capped between 0.8 and 2.0. This is a reasonable range for a stable business.
Dave & Buster’s Entertainment SWOT Analysis
- Revenue growth over the past year has outpaced the industry.
- Debt is well covered by earnings and cash flow.
- PLAY has no major weaknesses identified.
- Annual revenue is projected to grow faster than the US market.
- Good value based on P/E ratio and estimated fair value.
- Large insider purchases in the last three months.
- Revenue is projected to grow at a pace of less than 20% annually.
Go ahead:
Importantly, ideally, DCF calculations are not the only analysis that scrutinizes a company. A DCF model cannot give foolproof estimates. Rather, it should be viewed as a guide to “What assumptions need to be true for this stock to be undervalued/overvalued?” For example, changes in a company’s cost of equity or risk-free ratio can have a significant impact on valuations. As for Dave & Buster’s Entertainment, he has put together three items that deserve more recognition.
- risk: As an example, 1 Dave & Buster’s Entertainment warning sign What you need to consider before investing here.
- management: Are Insiders Raising Their Shares To Capitalize On Market Sentiment On PLAY’s Future Prospects? Check Us Out Management and Board Analysis Provides insight into CEO compensation and governance factors.
- Other solid businesses: Low debt, high return on equity and a strong past performance are the cornerstones of a strong business.why not explore An interactive list of stocks with solid business fundamentals To see if there are other companies you might not be considering!
PS. Simply Wall St updates his DCF calculations for all US stocks daily, so if you want to find the intrinsic value of other stocks, search.
Valuation is complicated, but we’re here to help make it simple.
Check out our comprehensive analysis on whether Dave & Buster’s Entertainment may be overrated or underrated, including: Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative materials. Is not …