The financial structure of many casino companies has changed dramatically in recent years.
Where most were 100 percent property owners before, many now are rent-paying tenants. Where their businesses were purely brick-and-mortar, many now include digital components offering online casinos and sports betting.
These changes have prompted sell-side analyst Carlo Santarelli of Deutsche Bank to suggest that the conventional method of valuing companies by multiples of EBITDA (or EBITDAR for the rent payers) might not work as well today.
Valuing companies based on free cash flow may be better, he says.
In a special research note on the topic, Santarelli did a detailed analysis based on a number of historical statistical assumptions and norms to arrive at that conclusion.
Based on his analysis, companies that own their real estate and are not involved in digital gaming appear under-valued by the market – Red Rock Resorts with potential 56.8 percent upside and Golden Entertainment by 52.6 percent. Boyd Gaming, which is primarily its own landowner, had a 72.9 percent appreciation potential to reach its implied value as of the date of his analysis published June 16.
Interestingly, Wynn Resorts and Las Vegas Sands are around normal historical valuations. On the other side, Penn National and MGM Resorts, which have gone farthest along the asset-light model and into digital, he calculated as trading well above historical norms.
From a different perspective, Santarelli calculates that those on the so-called OpCo model convert 25 percent of adjusted property EBITDA into free cash flow, while those he calls WholeCo convert 45 percent.
There are obviously a lot of factors that go into how companies will grow value over time, but Santarelli offers an interesting analysis for investors to consider when trying to value today’s mixed model companies.
Down, But Not Out
Another interesting sell-side note comes from Dave Bain of B. Riley, who has lowered targets on a number of gaming companies, citing current market conditions and risks.
But, Bain argues, stocks are way oversold, with almost every name he covers selling well below historical enterprise value-to-EBITDA and well above what might be expected, even in recession.
To take the most extreme examples, Bain says current valuations imply EBITDA reductions next year of 55 percent for Light & Wonder, 49 percent for NeoGames, 47 percent for Century Casinos, 46 percent for AGS and 31 percent for Golden Entertainment.
Only one company, Penn National, is selling at higher than its historic level, but just barely, at 10 times 2023 forecasted EBITDA vs. historic norm of 9.9 times.
Simply put, EBITDA multiples are well below historical averages. Here’s a sampling:
Caesars 6.9 times vs. 9.7 times
Golden 6.0 8.8
Las Vegas Sands 9.3 13.1
MGM 9.8 12.5
Monarch 7.6 9.4
Wynn 9.7 12.8
Even companies on which Bain lowered targets have considerable upside based on current prices:
Company Current Price Bain’s Target
AGS $5.38 $16
Caesars $42.97 $128
Century $7.40 $15
Everi $16.58 $35
GAN $3.18 $6.50
Golden $41.57 $70
Inspired $9.07 $24
In addition to low valuations, Bain also sees many company-specific strengths for the seven companies above that he still rates as buys.
By nature, Bain is an upbeat, optimistic guy. But natural bullishness aside, he makes a good case that gaming stocks are way oversold.
