Optionality has become a popular word in describing brick-and-mortar gaming companies.
The reasons may have to do with the maturity of the business. After years of running up debt to expand, companies now find fewer growth opportunities, so they are paying down debt and taking other actions to open up their options.
The word applies to one of our long-time favorite stories – Golden Entertainment.
As readers of this space know, we bought into Golden shortly after it went public and when the stock was in the single and low double-digits. We rode it up to its all-time high of just shy of $60 a share a couple of years ago. The gains from that big run-up bought patience to hold through the period when it has for so long now sat in the $40s with the occasional slip into the $30s.
This is a transitional year for Golden. The business is being focused on southern Nevada casinos and taverns as slot routes and its Maryland casino are sold. The result will be a debt-to-EBITDA ratio down to 1.5 times or slightly lower accompanied by incremental growth projects such as adding taverns and continuing upgrades at the Strat in Las Vegas.
The result is expected to be an EBITDA of $230 million a year or more that, combined with the cash from asset sales, will put Golden in position to initiate a dividend and/or buy back shares. Assuming even a modest EBITDA multiple of eight or 8.5 times, a return to a stock price of $55 or higher seems reasonable.
The question is what happens then. That’s where optionality comes in. With low debt, plenty of free cash flow, steady EBITDA growth thanks to continued incremental capital investments and the chance to monetize its considerable real estate holdings, there are plenty of options.
One option a bit below the radar screen is to extend the tavern business into states like Montana and Illinois that allow bars to operate slots. In Nevada, Golden generates a 30 percent return on investment in taverns that, at $2.2 million each, means EBITDA around $700,000 per unit. The economics probably aren’t as good outside Nevada, but even a 20 or 25 percent return can offer steady, low-risk growth.
Then there are mergers and acquisitions, either Golden as a buyer given its balance sheet strength, or a seller given its currently undervalued assets.
In short, Golden isn’t the slam-dunk four-bagger of its early days as a public company, but its proven ownership and management has a lot of and here’s that word – optionality.
Personal Note, off topic:
As a young political reporter in the summer of 1976, I showed up at the mobile home that served as the Kent County Democratic campaign headquarters to cover the announcement by a 28-year-old unknown named Tom Carper of his candidacy for state treasurer of Delaware.
I showed up early. The only other person yet there was the political rookie himself. He handed me a copy of his announcement and asked for my opinion. It wasn’t well done. I suggested some changes. He made them.
This boyish (At the time I likened him to every mother’s son and said it would be to his electoral advantage) neophyte won election that November, then re-election two years later.
Our paths were to cross many times. He became a distance runner, as did I. We met repeatedly at local 10K races.
He went on to serve five terms in Congress and then two terms as governor. As governor, Tom twice appointed me to the state Tourism Advisory Board and later honored me with induction into the Delaware Tourism Hall of Fame. Truth be, it was just a name and there isn’t a real hall of fame that I know of, but it makes for a nice statue that I still own.
One of my favorite memories was when Tom and I co-emceed the governor’s annual volunteer awards dinner. We alternated announcements with a kind of banter that was pure fun for us and for an obviously appreciative audience.
Later, I worked with his wife, Martha, on projects for the Boys and Girls Clubs of Delaware.
A few days ago, Tom announced he will not seek reelection to the U.S. Senate, thus ending an elective career that began in that campaign trailer nearly five decades ago.
Last year, I sold my gaming investor newsletter to Eilers & Krejcik Gaming. So, Tom, I beat you to semi-retirement by a year.
