PLAY in Bull Flag After Earnings and Guidance Gap Up

Dave and Buster's Entertainment, Inc. (NASDAQ: PLAY) reported earnings on 6 December 2016 and continued a multi-year streak of better than expected EPS and revenue.  For Q3, they beat earnings by $0.11, and they beat on revenue by $11.96 million.  The restaurant and entertainment giant also increased their forward guidance for the fourth quarter, although they did caution in their earnings call that they expected their tremendous earnings growth to "normalize" in 2017.

The stock surged at the open on 7 December, gapping up by $6.50 and continuing the strong surge throughout the trading day.  Not surprisingly, volume was off the charts as demand for the stock soared.  Since then, PLAY traced a fairly tight bull flag that thus far has bottomed just above that 7 December open. 

PLAY Daily Chart

Volume throughout flag development continued to decline, and price is now gravitating towards the high of the flag trend-line.  Using just the pattern for guidance, the upward price target on a breakout is extremely attractive.  The 76.4% extension of the flagpole height would take us to $63.96 as measured from the current breakout point.

The current uptrend started with a breakout from a month long consolidation that formed right on top of the 200-day simple moving average.  The breakout was convincing on higher than average volume, and even the post-breakout consolidation had an upward trend to it.  The earnings gap appears to be a continuation gap, at this point. We've no evidence (yet) to suggest that it's an exhaustion gap, which means the bottom of the pattern on 7 December should roughly approximate the mid-point of the overall move.  That would certainly be possible if the current flag pattern is wave iv of a Wave 1 impulse.

Now, normally I don't look at fundamentals when analyzing a short-term trade, however given the size of the move being signaled it does appear to be prudent to see if it's practical.  Let's take a quick look at Morningstar's Industry Comparison for PLAY.  A few key ratios jump out at us:

• P/E is 28.0 compared to 25.6 for the industry.
• PLAY is trading at 5.6 times book compared to an industry average of 13.2 times book.
• Price per sales is comparable at 2.5 versus 2.4.
• Margins are a bit low compared to the industry, showing room to grow.

The challenge with PLAY is that they are fairly unique in the industry.  Their restaurants combine dining and entertainment in a game-room style setting that targets both children and adults.  Locations in malls that offer large Cineplex style theaters have no comparable competitors and have a fairly unique operating model that has a proven track record.

A price target of $63.96 would boost the P/E to 34.6.  That level is high, certainly, but is it unrealistic?  Dunkin Brands sits at 38.2, Domino's at 72.6, and Panera Bread at 35.1, yet none of those brands offer entertainment as well as dining.  Given the rate of growth PLAY continues to experience, even if "normalized" in 2017, that multiple will likely decline, continuing to make this an attractive stock.

CEO Steve King summed up the growth potential in his Q3 earnings call: "As a reminder, we are targeting 10% or more unit growth per year including combination of large and small store formats as we mentioned likely to be 12% to 13% next year. Our 2017 target is that 11 to 12 stores with that growth rate of 12% to 13% as in years past, you see entire spectrum of stores between 25,000 and 45,000 square feet and currently we have 23 signed leases and nine of those units under construction."

 The conclusion I reach is that the price target signaled by both the continuation gap and the flag pattern is indeed a realistic and achievable target.  For now, this appears to be a long only trade with little indication that there's a play to the short side.  What we will be watching for is a close above the flag pattern, at which point we'll enter long.  A protective stop will be the bottom of the flag channel, and we'll set the price target at $63.96.  As usual, we'll begin to tighten our stops at the 50% and 61.8% extensions since either of those could cause either consolidation or correction. Watch for the break of that flag, however, since we do want confirmation of the continuation gap.

Happy Trading.

June Retail Sales Add to Constently Good News This Month

The Commerce Department released the Retail Sales Report for June, and the estimate-beating increase continues to add to the increasingly good news coming out in each of this month's economic reports.  The combination of strong economic data, strong corporate earnings, and a lower forecast on interest rate hikes continues to drive the market indices to record highs.  Finally, it appears that the market is reacting to data, not hype.

Today's report underscored significant strength in each of the key areas:

• Sales at retailers and restaurants rose 0.6%.
• Sales year over year were up 2.7%, although when you subtract out automotive sales and auto parts, that year over year number becomes 0.7%.
• Sales of building materials and gardening supplies were up 3.9%.

With the current earnings season ending its first week, the retail sales report is very good news as we await some of the major players to report over the next few weeks.  Yum Brands already lead the way in the restaurant industry, although their report was somewhat lackluster.  They beat on earnings by only $0.01 and missed on revenue by $90 million.  As we saw for the first five months of the year, though, the growth rate across the industry was extremely sluggish, only surging in the June numbers.  Underscoring that trend, Yum Brands increased their guidance for 2016 forecasting full-year core operating profit growth to be at least 14%, up from last year's 12%.  The retail numbers released this morning support that guidance.

In the Automotive industry, we use Ford (NYSE:F) as the bellwether.  They report before the open on the 28th.  We'll be watching the seasonably adjusted annual percentage rate of cars sold, which, if  the retail sales report is any indication, should be a decent quarter for the industry.  Also keep an eye on Magna International, (NYSE:MGA) a Canadian automotive parts supplier that does business worldwide.  Their earnings report typically provides a fantastic overview of the health of the industry across the globe.  Their earnings date has not yet been announced, but we expect it to be before the bell either August 5th or 8th.

The surge in building materials and gardening supplies should be excellent news for the large home improvement retailers like Lowes (NYSE:LOW) and Home Depot (NYSE:HD).  They report August 17th pre-market and August 16th pre-market respectively. 

In addition to the specific stock projections we can glean from these numbers, there is also the signal that consumer confidence is on the rise.  That boost in spending should translate into a healthy nudge for the GDP, and with interest rates remaining low, we should also see an increase in corporate capital expenses and a corresponding increase in hiring.  All-in-all, it was a very positive report, and it bodes well for the overall health of the current rally.