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Smaller But Better

While much of the investment attention is focused on the big multi-national gaming companies, the secondary companies are making big gains.

Smaller But Better

Investment news is dominated by big companies, obviously and rightly.

After all, a Las Vegas Sands with a market cap over $56 billion can be considered of 14 times greater interest than a Churchill Downs at $4 billion or 75 times a Monarch Casino at $750 million.

And yet, smaller companies have provided some of the best returns and opportunities.

Here are a few casino operators worth noting:

  • Churchill Downs. Everybody knows Churchill Downs. It’s the Kentucky Derby. It’s the most famous name in horse racing.

How many would know that last year, Churchill got more revenue—$333 million—from casinos than from racing, at $268 million? Casinos also provided the biggest chunk of EBITDA at 38 percent versus 24 percent for racing.

Casinos will continue to grow, as Churchill is buying Lady Luck in Vicksburg, Mississippi, and Presque Isle Downs in Pennsylvania from Eldorado Resorts for $230 million.

Here’s another interesting fact: While many gaming stocks have sold off since January, Churchill is within 1 percent of its high as of this writing. One reason might be that Churchill sold social gamer Big Fish Games for $990 million, then used the proceeds to buy back more than 10 percent of its stock for $500 million, pay down and refinance debt, and buy Presque Isle and Lady Luck.

Not bad moves for a company that obviously does more than Derby Day.

  • Eldorado. The question for Eldorado was whether this family-controlled company could manage the national network of casinos it bought from Isle of Capri.

The early answer is, yes it can.

Eldorado grew EBITDA 16.3 percent to $91 million by increasing margins 3 percentage points. CEO Gary Carano says there is more to come, given the company is early in the process of rationalizing marketing spending and improving food and beverage operations at the new properties.

The sale of Lady Luck Vicksburg and Presque Isle Downs to Churchill Downs also fit with Eldorado’s strategy of focusing on businesses that can generate greater profits.

Clearly, Eldorado is benefiting by bringing efficiency to Isle’s operations while maintaining a balance sheet that will permit growth through more acquisitions.

  • Full House Resorts is a micro cap with a market value of just over $70 million.

The story is CEO Dan Lee’s tireless efforts to find ways to grow revenue, even though that was masked by a fourth quarter wracked by bad weather.

Over time, Full House will grow. But the big development to look for is whether the city of Cripple Creek in Colorado approves plans to add a luxury-quality hotel at Bronco Billy’s. If it does, Full House can double in size.

  • Golden Entertainment has not reported fourth-quarter earnings as of this writing, so its big news is a little older, but still worth noting.

Golden more than tripled EBITDA with negligible dilution when it bought American Casino and Entertainment properties last year.

The purchase converted the mostly slot route-tavern operator into a casino company. Three-quarters of business now comes from casinos, although slot route and tavern expansions continue on track.

Like Eldorado profiting by making Isle of Capri properties efficient, Golden Entertainment has low-hanging fruit with the four acquired casinos—Stratosphere, two Arizona Charlie’s and Aquarius in Laughlin.

CEO Blake Sartini and COO Steve Arcana are casino guys as veterans of Station Casinos, now Red Rock Resorts. They are taking over properties that had not been well managed or kept up to date by previous owner Goldman Sachs. Given their pedigrees, Sartini and Arcana can be expected to bring them up to speed.

A final note. It isn’t often that a CEO selling stock is good news. But Blake Sartini has been clear since Golden went public several years ago that his goal was shareholder value, not controlling the stock.

Thus, his recent stock sale increased liquidity at thinly traded Golden without diluting shareholders.

  • Monarch Casino, like Full House, reported a decline in fourth-quarter earnings for what should prove temporary reasons.

The underlying business continued to grow, and flagship Atlantis casino continues to benefit from the Reno renaissance.

But the stunning figure deep down in Monarch’s earnings news release was the comment by CEO John Farahi that, after the transformative expansion of Monarch Casino in Black Hawk, Colorado, into a destination resort, debt-to-EBITDA will be less than two times. Monarch has financed the project from available cash so far, and has just $217 million left to spend on the $407 million project.

Thus, the Monarch expansion could nearly double company EBITDA to $110 million or so, putting Monarch in position to comfortably afford an acquisition.

  • Tropicana Entertainment is almost a stealth public company. It has no analyst coverage because it is mostly owned by Carl Icahn, leaving few shares for others to buy.

It doesn’t help that its flagship Tropicana casino is in Atlantic City, which hasn’t shaken its reputation as being down and out despite steadily growing gaming revenues in recent times.

However, those who have bought Tropicana’s shares have been rewarded with a stock nearly doubling in price in the past year.

Yet Trop sells for just over seven times enterprise value-to-EBITDA and generated more EBITDA last year at $186 million than it has long-term debt, of $137 million.

For those a little insecure about investing in a company owned by wheeler-dealer Icahn, there is some comfort in knowing that he has the most at stake as majority shareholder.

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