Golden Entertainment stock shot up 9.2 percent in the two days after JP Morgan initiated coverage with a buy rating.
Golden’s stock has been a rollercoaster for several years. From a single-digit price, it soared to nearly $35 a share, then sank into the $12s after missing analyst’s estimates for a couple of quarters.
As often happens when a stock collapses while the story stays the same, sell-side analysts lowered targets while maintaining their long-term bullishness.
Analysts who have stuck with Golden are more right than wrong, in our view. The long-term story remains the same with most estimates that EBITDA should grow to over $180 million this year and reach $200 million or so in 2021, with free cash flow at $3.50 to $3.60 a share.
JP Morgan analyst Dan Politzer calculates that at seven times his EBITDA forecast, the stock should reach $18. Others, such as David Katz of Jefferies, sees the stock at $21 assuming 7.5 times his EBITDA estimate, though Katz also sees upside to $30.
The reasons for Golden’s stock collapsing appear to be several: Missing estimates, some analysts expecting profit growth to come too quickly, and the nagging concern that Golden will be just another in a line of those who mistakenly thought they can transform the Stratosphere in Las Vegas into something like a Strip property and convert Laughlin into a profitable satellite of Las Vegas. And, there is debt that, absent growth from the Strat and Laughlin, has reached 5.5 times EBITDA.
However, we now may be approaching an inflection point. The $140 million renovations to the Strat are nearing completion and the company might pause from further spending programs to harvest expected improvements in business volumes and room pricing allowing debt-to-EBITDA to reach a less risky level.
The company has targeted a 15 percent return on investment, which translates to a modest $26 million. But the benefits might exceed that in part because the property had been so neglected for so many years that $26 million could be picking low-hanging fruit.
Consider, just 6 percent of hotel guests are rated gamblers. Raise that to 10 percent and a lot of money can flow. The Strat has been dependent on online travel agencies to fill its rooms. As it builds a player database, the Strat can ease that dependence and, combined with the pricing power of renovated rooms and suites, hotel rates and gambling revenue per room can rise significantly. More than 2 million people a year visit the Stratosphere tower. CEO Blake Sartini has a seemingly modest goal of generating $20 more per visitor through new amenities and dining options.
Over time, the northward expansion of the Strip with major projects such as the Drew and new convention facilities should combine with the city’s efforts to improve the Strat’s neighborhood to allow the property to achieve the performance of a mid-level Strip property.
Then there’s sleepy Laughlin. Even if Golden doesn’t achieve its goal of making Laughlin a significant getaway for Las Vegas residents 90 miles away, just returning business to pre-Great Recession levels means 30 percent plus growth, and GDEN now owns 40 percent of the market.
Then there are the taverns, which achieve about $500,000 a year EBITDA each, and keep growing by around a half-dozen a year, and the slot route operations, a low-margin but steady business.
The simplest way to put it is that Golden gets 90 percent of its business from southern Nevada, among the nation’s fastest growing regions, and it’s run by experienced casino executives.
Combine all of these factors and scenarios can be painted where EBITDA goes well beyond what Politzer and Katz project, and the stock price along with it.
