After years of struggling to gain traction, Dave & Buster’s (NASDAQ: PLAY) has the opportunity to reinvigorate the business with a new CEO. Former CEO Chris Morris’ surprise departure clouds the outlook and increases uncertainty about execution, but a good choice can put that to rest. The board says it’s been looking for a successor, so it may take long to find a good fit. The company is in fine financial shape and can generate profits; the only question is how long it will take to turn the ship around.
Dave & Buster’s Struggles With Headwinds in Q3
Dave & Buster’s business struggled with numerous headwinds in Q3, including economic, consumer, a significant calendar mismatch, weather, and the impact of remodeling efforts. The takeaway is that revenue declined by 3% year-over-year despite the increased store count, underperformed the consensus, and margins contracted. The revenue weakness was driven by a negative 7.7% comp adjusted for the calendar shift, as traffic and tickets were both affected. The bad news is obvious, but there is a silver lining: remodeling efforts continue to drive results at completed locations. Those locations resonate with consumers and outperform older layouts.
The margin news is the worst in the report. The company’s margin contracted on costs, investments, and deleveraging and is not expected to bounce back quickly. The adjusted EBITDA margin contracted by 240 basis points to 15.1%, driving a 16% dollar decline. The GAAP losses widened, and adjusted profitability proved elusive, resulting in negative cash flow for the quarter. The upshot is that many items impacting the margin, including consumer headwinds and remodeling, are expected to have a diminishing impact in future quarters, leading to improved cash flow and leverage.
The company failed to provide specific guidance but gave sufficient detail to garner an optimistic business outlook. The Q4 sales may be below the forecasts issued before the release but should show significant sequential growth. Strength will be driven by seasonal trends and supported by a rebound in the events business, improving customer satisfaction, new stores, and remodels. The company is on track with its remodel efforts, showing it can execute, and the store count is up three for the quarter. The company plans to complete at least 40 remodels by the year’s end, and the store count will continue growing.
Dave & Buster’s Buybacks Are at Risk
Dave & Buster’s continued to buy back shares in Q3, reducing the count by more than 5% on a year-to-date basis, and it will likely continue repurchasing shares. However, with the business struggling to gain traction and the cash flow negative, the pace may slow, or buybacks may be paused until cash flow improves. As it is, the company’s total net leverage ratio is within its target range at 2.6x but relatively high regarding equity at over 6x, so there is cause for concern. The company refinanced some debt during the quarter, which helped, but it could only sustain its balance sheet health for so long while burning capital.
Analysts were not jazzed by the news, issuing numerous revisions, including several rating downgrades and more price target reductions. The takeaway is that analysts have lowered sentiment to Hold, and the consensus price target fell more than 10% overnight. The consensus implies a significant upside, about 80%, with shares at long-term lows, but the revisions are lower and suggest this stock is fairly valued with little room to advance.
Dave & Buster’s Hits Rock Bottom, But Will It Bounce?
Dave & Buster’s stock price tanked following the Q3 release, falling more than 15%, aided by short-selling. The short interest was high heading into the release at 16% and is likely higher now. The question is whether the market can fall any further, and the answer is yes. The price action is on a critical support target but is not showing signs of a rebound yet. The market could fall below support in this scenario and potentially confirm it as resistance soon after. That would indicate a complete market reversal, possibly resulting in a sustained downtrend and selling off to much lower levels. If the market confirms support near $30.50, it will likely continue to move sideways as it has for the last few years.
The start of December 2024 brought a story that some investors were already expecting to see, just not in the way that it happened. Despite rising cocoa prices and a seeming disinterest in consumer staples stocks, shares of Hershey Co. (NYSE: HSY) rallied on some unexpected news. For those who understand a value investment, the news of a potential takeover bid was nothing out of the ordinary.
For reasons that will become clear in just a minute, Hershey stock—and the company behind it—is a screaming buy at these prices, even after the recent rally. Even without any financial analysis of the business, investors can lean on this fact: Hershey’s management decided to reject the offer, citing that the valuation given on the takeover bid was “too low.” Contrary to what some may think, that is an excellent move that Wall Street analysts agree with.
Before a deep dive into the company’s strengths and what might lie ahead to trigger a potential buying spree in its stock, the details of this takeover bid from Mondelez International Inc. (NASDAQ: MDLZ) should be covered first so that it is understood what was brought to the table and why management decided that it wasn’t good enough of an offer today. Whichever way it is looked at, chances are this stock has enough double-digit upside potential stored in it for the coming months.
The Takeover Bid Hershey Turned Down: Offer Details and Management’s Reasons for Rejection
While no sources are quoting the size of the deal offered by Mondelez, there are ways that investors can reverse engineer what the initial bid might have been. The way markets led the stock to a high of $208 a share on the news is one way to set expectations, both where Mondelez might have approached a bid and where management thought it too low.
This $208 per share price would represent a market capitalization of up to $39 billion on a valuation basis. Yet, it is only a fraction of the company’s size just over a year ago at $56 billion. Taking it from a historical perspective, investors could guesstimate that the stock is then worth anywhere from $208 a share to its all-time high of roughly $275 a share.
There are a few reasons why management would reject this offer, one of which is that most staple brands in the market today are losing favor to other hot developments in the technology sector, namely artificial intelligence and quantum computing.
This is why stocks like Coca-Cola Co. (NYSE: KO) and PepsiCo Inc. (NASDAQ: PEP)have traded lower in the past few months. The stock market is a popularity contest in the short term, and the contest is being won by other more exciting names, making these solid brands potential buys today.
This is Why Hershey Stock Has More Upside Ahead
Now that investors have a proxy for a potential valuation range in Hershey’s stock, it is time to dig a little deeper and dissect the public opinion around this stock and the reasons why that opinion is so. When it comes to Wall Street analysts, the consensus view of a $185.2 a share valuation doesn’t do justice to where this stock should trade.
In April of 2023, analysts thought the stock should have a price target of up to $265 a share, yet something has stayed the same from then to today, making it a little suspicious as to why price targets have declined so much. This could be due to the declining stock price, putting additional pressure on analysts to reflect the market’s opinion.
However, Hershey’s financials will tell a completely different story, one that could soon turn analyst opinions on their heads. The company’s gross margins, which stood at 44.5% as of the past 12 months, signal a potential moat and pricing power dynamic in the brand’s market share.
Retaining so much capital after each sale allows management to effectively reinvest in the business and create further enterprise value, which is why investors will notice a return on invested capital (ROIC) rate of up to 25% for Hershey.
This is important because annual stock prices tend to match the long-term ROIC rate over time; that is also why investors will see a 200% outperformance in Hershey stock against the S&P 500 over the past 24 years, one that would have been closer to 500% if it wasn’t for the stock’s decline over the past 12 months.
Another gauge to back this belief can be found in institutional investing; as of November 2024, those at State Street felt confident enough in the stock’s value that they boosted their holdings in it by 5.8%, bringing their net positions to a high of $1.3 billion today, or 3.5% ownership in the company.
Texas Instruments Incorporated (NASDAQ: TXN) is a name synonymous with innovation in the semiconductor industry. Established in 1930, Texas Instruments (TI) has a long and storied history of adapting to technological advancements and maintaining a leadership position within its sector. TI is now leveraging significant investments and strategic initiatives, including substantial CHIPS Act funding, to reshape its manufacturing capacity and solidify its future. This transformation presents exciting opportunities and potential challenges for investors interested in being a part of a long-term legacy semiconductor play.
Understanding TI’s Core Businesses
Texas Instruments operates through two core segments: Analog and Embedded Processing. The Analog segment provides essential components like power management integrated circuits (IC), which are found in everything from smartphones to electric vehicles, signal chain products that are crucial for sensing and data acquisition, and interface solutions for connecting different electronic systems.
The Embedded Processing segment delivers microcontrollers, which are the “brains” of many embedded systems, digital signal processors (DSP) that power complex calculations in everyday devices, and application processors that are tailored for specific computing requirements.
TI’s vertical integration strategy is a key source of its competitive advantage. Controlling a significant portion of its manufacturing process gives TI greater control over quality, costs, and supply chain resilience. This allows it to deliver consistently strong profit margins. TI’s focus on mature technology nodes, such as 28nm to 130nm, strikes a balance between cost efficiency and reliable performance. This strategy provides a sustainable approach to meeting consistent market demand for reliable chips while managing production costs effectively. This strategic approach contributes significantly to TI’s long-term profitability and competitive position within the sector.
Solid Fundamentals Despite Soft Industrial Demand
Texas Instruments’ stock price has demonstrated a healthy growth of over 22% in the past year, reflecting the company’s resilience. While Texas Instrument’s earnings report for the third quarter of fiscal 2024 (Q3 FY2024) revealed revenue of $4.15 billion, which marginally exceeded Texas Instrument’s analyst community estimates, it marked an 8% year-over-year decline, primarily driven by softer-than-expected demand within the Industrial sector. This revenue dip is a cause for concern. Despite this headwind, the company significantly outperformed expectations in adjusted operating income and earnings per share (EPS). Q3 FY2024 EPS reached $1.47, which substantially exceeded the consensus estimate of $1.38, a positive sign of efficient operations.
The company’s trailing twelve-month EPS of $5.38 underscores its overall profitability. While the price-to-earnings (P/E) ratio of 35.56 warrants attention relative to its growth trajectory and peer valuations, a strong return on equity (ROE) of 29.05% and a healthy net margin further highlight efficient capital use.
The CHIPS Act: A Catalyst for Growth?
The CHIPS and Science Act has provided a significant boost to TI through proposed direct funding of up to $1.6 billion, complemented by anticipated investment tax credits estimated at $6 billion to $8 billion. This substantial injection of capital will support TI’s expansion of its 300mm wafer fabrication facilities in Texas and Utah, enhancing its production capacity and furthering its commitment to domestic manufacturing.
This expansion has the potential to strengthen TI’s position within the industry significantly, boosting its market share and improving its resilience in the face of global supply chain disruptions. However, the successful execution of these expansion plans hinges on multiple factors, including timely project completion, cost management, and ongoing demand for semiconductors. Potential delays or cost overruns could impact profitability and should be considered by investors.
A Legacy of Dividends: Strength and Risk
Texas Instruments holds an exceptional track record of dividend growth, with 21 consecutive years of increases. This consistency makes TI particularly appealing to income-oriented investors. The current annual dividend stands at $5.44, translating to a yield of approximately 2.86%. However, a crucial point for investors to consider is the current dividend payout ratio, which exceeds 100% based on trailing twelve-month earnings. While this might be sustainable in the near term due to cash flow generation, it underscores a potential vulnerability.
Long-term investors should carefully analyze TI’s projected earnings growth to assess the sustainability of this high dividend payout ratio. In comparison to competitors in the semiconductor industry, TI’s dividend yield is higher than average. Still, the relatively high payout ratio must be taken into consideration during a financial risk assessment.
TI’s Institutional Confidence and Market Sentiment
Texas Instruments enjoys substantial institutional ownership, approximately 85%, indicating a high degree of confidence from seasoned investors. This strong institutional backing suggests a generally positive outlook on the company’s long-term prospects.
However, current analyst sentiment is varied, with some firms maintaining Buy ratings and price targets of $230.00 and $235.00, and other firms significantly upgrading the stock as high as $298.00. Still, other analysts express more caution, issuing Hold or even Sell ratings. This volatility in analyst ratings reflects the acknowledgment of the company’s shifting strategy and the inherent volatility of the semiconductor sector.
Navigating the Risks
Investing in Texas Instruments, like any investment in the semiconductor industry, involves inherent risks. The sector is known for its cyclical nature, with fluctuations in demand influenced by macroeconomic conditions and technological advancements. Competition is fierce, and TI faces continuous pressure to innovate and maintain its technological edge.
Global supply chain disruptions and geopolitical instability present ongoing uncertainties. Investors must also carefully evaluate the company’s dependence on key markets and its ability to mitigate supply chain-related risks.
A Calculated Approach
Texas Instruments offers a compelling blend of stability and growth potential for investors. Its long history of innovation, strong financial performance, and commitment to returning value to shareholders through dividend growth are undeniable strengths.
However, a high dividend payout ratio, potential sector headwinds, and the inherent cyclicality of the semiconductor industry all demand careful consideration. Therefore, investors should perform thorough due diligence, evaluate the company’s strategic vision and financial performance within the wider market context, and assess their risk tolerance before making any investment decisions.
The Night Owl is a financial newsletter that provides in-depth market analysis on stocks of interest to individual investors. Published by MarketBeat and Early Bird Publishing, The Night Owl is delivered around 9:00 PM Eastern Sunday through Thursday. If you give a hoot about the market, The Night Owl is the newsletter for you.
MarketBeat Media, LLC
345 N Reid Place, Suite 620, Sioux Falls, SD 57103. contact@marketbeat.com
