Gaming stocks have come down hard recently on a variety of concerns ranging from rising interest rates to a slowing Chinese economy.
One concern has been whether they are overvalued, especially considering such issues.
But Carlo Santarelli of Deutsche Bank has done some work that puts prices in reassuring perspective.
Santarelli presented enterprise value-to-EBITDA ratios going back 15 years and found that valuations are right around historic norms.
For example, the year-to-date ratios for regional casinos as of October 23 was 8.4 times EBITDA, just below the 15-year average of 8.5 times.
Suppliers he covers were 7.9 times compared to an average of 8.0, and REITS, with a much shorter history, were 13.8 times compared to the 12.8 times since Gaming & Leisure Properties became the first gaming REIT four years ago. GLPI’s ratio was just 12.7 times as of October 23.
The casino big caps—Caesars, Las Vegas Sands, MGM and Wynn—were downright cheap on the enterprise value-EBITDA measure at 9.9 times. As a group, they could advance 31 percent before reaching their historic average of 13 times.
The valuations are even cheaper if using October 23 prices, rather than year-to-date. Regional casinos then were at just 7.7 times, big caps at just 8.2 and suppliers IGT at a mere 6.0 times and Scientific Games at 7.6 times.
Still A Golden Opportunity
Perhaps the most punished casino stock is of special interest to us—Golden Entertainment, one of our Nevada Triple Play recommendations along with Eldorado and Monarch Casino.
As of this writing, Golden is down 47 percent from its 52-week high of $34.75.
Golden’s stock appears to have been hit by some disappointment as its slot route business in Nevada has softened thanks to lower customer traffic in retail stores and because the weak third quarter along the Las Vegas Strip dampened business at the Stratosphere.
However, the sell-off appears way over done. Look at the business: slot routes are not going away. In fact, Golden keeps opening its own taverns with slots at about a half-dozen a year. Each tavern adds $500,000 in EBITDA like clockwork. Las Vegas Valley population growth will more than offset slower foot traffic in stores.
The Strip is already recovering from the weak third quarter that was driven mostly by fewer major events than last year. Plus, Golden will get boosts going forward from Stratosphere’s room and property renovations.
Its two Arizona Charlies locals casinos benefit from the Las Vegas economic and population boom. And Golden soon closes on the acquisition of two casinos in Laughlin that will give it 40 percent of the market and ownership of the 12,000-seat Laughlin Events Center.
Using conservative assumptions, all of that should combine for around $240 million in EBITDA in 2020. Value that at regional casinos’ historic 8.5 times enterprise value-to-EBITDA and the stock price nears $40.
Even if the valuation doesn’t advance beyond today’s mere 6.5 times, the stock calculates to $23 a share, 24 percent higher than as of this writing.
And none of this counts any success for Golden’s strategy to make Laughlin a get-away for the 2.2 million residents of Las Vegas Valley. It doesn’t account for any other acquisitions that add value, as every acquisition has so far. It also makes conservative assumptions on Stratosphere’s renovations.
In brief, we’re happy to hold Golden and let the market come around to its fundamentals.
