Regional casino stocks might be the place for equity investors to be in 2019.
The group sold off a stunning 37 percent last year despite strong business trends, acquisitions that promised to add to earnings and management teams focused on continuing to improve operating margins.
The results are stocks stuck in cheap valuation ranges around seven and eight times EBITDA in a business environment that calls for higher prices and in a world where real estate investment trusts are buying casinos at 10 times and higher.
Now, there is no predicting the future. A recession could turn the rosy fundamentals south. A company can make bad decisions.
But what is seen and known spells out one word: opportunity.
As of this writing, regional stocks are rebounding nicely. In part that is because investors are seeing that the sell-off created prices disconnected from the strength and prospects of the underlying businesses.
It also has helped that some equity analysts have been pounding the table on regional casino operators.
Carlo Santarelli of Deutsche Bank is one of the regional bulls. He published a research note pointing out their strengths, and two interesting facts: 1) Regional casino stocks have never dropped two years in a row, and 2) Their stock prices have always correlated with consumer confidence, which is running at the highest levels since 2000.
Santarelli also noted, as I mentioned above, that the low valuations might make casinos attractive targets for REIT acquisitions, thus giving investors the opportunity to buy low and sell high.
Another analyst who has issued a strong call on regional casino operators is Chad Beynon of Macquarie.
Beynon, among other things, cited strong cash flows, defensive nature in the stocks, and lack of exposure to China that has worried investors of other stocks and sectors. This is an ideal time to invest in regional operators, he said.
It also is worth noting that several regional companies enjoy some of the fastest-growing markets in the country.
Red Rock Resorts and Golden Entertainment are highly concentrated in Las Vegas, the nation’s fastest-growing metro. Monarch Casino is in Reno and greater Denver, two other fast-growing metros. Eldorado, likewise, has considerable exposure to Reno and Denver. Boyd has big stakes in the Las Vegas locals market and Downtown Las Vegas.
Each company also has its unique growth story. Monarch is transforming its Black Hawk, Colorado, casino into a destination-quality resort. Red Rock is making big investments in the Palms and Palace Station.
Penn National, Eldorado and Boyd also have been buying gaming operations in collaboration with the REITs, giving them both more revenues and opportunities to raise profitability by reducing costs.
Golden likewise has been a buyer, but with the added benefit of also buying the real estate, giving it appreciating assets, and without having to pay rent to REIT property owners.
It also is sometimes worth paying attention to what really smart people do. Mario Gabelli, for example, has become a major shareholder in Full House Resorts, owning 8.54 percent of the company.
As small as Full House is—market cap just under $60 million—Gabelli’s investment is pocket change for him. But it illustrates that one of the most successful stock investors of our times sees enough value that he’s willing to invest in a micro cap.
Santarelli and Beynon have target prices generally 25 percent to 35 percent above the stock prices when they issued their early January reports.
But one company offers much greater returns—Golden Entertainment. Santarelli has a $38 target on Golden and Beynon $34. The stock is around $17.70 as this column is being written, making it a double if they are right.
Readers of this space know we are fans of Golden and can see it at $40 and higher over time if the company is right about its growth strategies, executes on them and gets a proper valuation.
The company has transformed through acquisition from around $45 million in EBITDA to what in several years should be $250 million, all with few new shares being issued.
The great majority of that business is in Las Vegas, where Golden owns the Stratosphere, two locals casinos and a growing network of highly profitable taverns, and in Laughlin, Nevada, 90 miles south of Las Vegas, where it will have three properties that control around 40 percent of the $500 million gaming revenue market.
That is a lot of exposure to the fastest-growing metro in the country, and a lot of potential if Golden succeeds in fulfilling the Stratosphere’s potential and making Laughlin a getaway for the 2.2 million residents of the Las Vegas Valley.
Finally, when considering regional casinos, one has to look at the three gaming REITs—Gaming & Leisure Properties, VICI Properties and MGM Growth Properties.
If regional casino companies succeed, the REITs succeed. If regional casino valuations don’t rise, REITs can step in and buy the properties at prices attractive to owners.
And with each purchase, the REITs add to their rental income, boosting profitability and stock prices. In other words, they combine reliable recurring revenues with growth opportunities.
Investors also get cash every three months in the form of dividends. Consider their dividend yields: GLPI 8.25 percent, VICI 6.2 percent, MGP 6.7 percent. Combined with their growth prospects, that’s a lot of potential total return.
