Are you ready to play? Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) is among the few companies still left to report earnings this quarter — September 14 before market open. And judging from the Dave & Buster’s stock reaction to last quarter’s earnings, the potential for profit here is huge.
There are a couple of broad economic factors working in Dave & Buster stock’s favor right now. Consumer spending is rising faster than many economists had predicted. In July, U.S. retail sales rose a larger-than-expected 0.5%.
What’s more, restaurants reported a 1.3% rise in sales to $61.6 billion on the month. As a result, the restaurant industry’s annualized three-month gain rose to 25.3% — the fastest pace since 1992!
This enthusiasm has actually become a problem for D&B’s, however. Expectations have risen considerably in the past several months. Currently, analysts expect D&B’s to post a second-quarter profit of 67 cents per share tomorrow morning. Revenue is expected to rise 12.3% to $315.25 million.
But, real expectations may be set considerably higher. According to EarningsWhispers.com, the whisper number of D&B’s earnings comes in at 71 cents per share — 4 cents higher than the consensus.
And that’s not all. Thomson/First Call reports that all 10 analysts following Dave & Buster’s stock rate the shares a “buy” or better, with no “sells” or even “holds” to be found. Additionally, the 12-month price-target of $64.56 represents a 14.1% premium to current prices.
Click to Enlarge Even options traders are getting in on the bullish bandwagon. Currently, the September put/call open interest ratio for Dave & Buster’s stock rests at 0.75. This may seem like a high rating compared to most stocks, but it is among the lowest taken this year for PLAY.
There are also technical risks for Dave & Buster’s stock. The shares are currently retreating from overhead resistance in the $59-$60 region, putting the stock at risk of a double-top reversal. This top also coincides with a rollover from overbought levels, with PLAY’s 14-day relative-strength index set to roll lower.
All of this adds up to downside risk for PLAY stock unless D&B’s offers up another blowout quarter tomorrow morning. Furthermore, there is a real risk that the company could issue cautious guidance — especially with Hurricane Florence bearing down on the East Coast. Analysts predict that restaurant stocks could be among the hardest hit by the fallout of this massive storm.
Finally, September implied is pricing in a rather sizable post-earnings move for PLAY stock of more than 9%. This puts the upper bound for a post earnings move near $62, and the lower bound near $51.50.
2 Trades for Dave & Buster’s Stock
Put Spread: With the bar set exceedingly high for PLAY, Dave & Buster’s stock looks quite vulnerable right now. Traders looking to bet against PLAY stock might want to consider an October $50/$55 bear put spread. At last check, this spread was offered at $1.50, or $150 per pair of contracts. Breakeven lies at $53.45, while a maximum profit of $3.50, or $350 per pair of contracts is possible if Dave & Buster’s stock closes at or below $50 when October options expire.
Call Spread: There is also the very real possibility that all this hype surrounding D&B’s is for good reason. The company could once again surprise investors with a solid report and strong guidance. What’s more, the recent dip out of overbought territory could aid the shares following earnings.
Traders looking to bet bullish on Dave & Buster’s stock may want to consider an October $60/$65 bull call spread. At last check, this spread was offered at $1.05, or $105 per pair of contracts. Breakeven lies at $61.05, while a maximum profit of $3.95, or $395 per pair of contracts, is possible if PLAY closes at or above $65 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.