A few years ago, I issued a report to top-tier clients titled “Nevada Triple Play.” It extolled the virtues of three small, family-controlled, publicly-traded casino operators based in the Silver State. Anyone who followed me into those investments and stayed has done very well.
Since then, Eldorado has returned 1,000 percent as it transformed into Caesars; Golden Entertainment’s return has been around 700 percent; and Monarch Casino has quadrupled.
Now, with so much accomplished and in today’s different environment, from Covid to mobile gaming to inflation, it’s reasonable to ask if those three stocks are still a place for new money.
The answer, from this perspective, is a rousing yes.
They still benefit from growing markets, the robust rebound of gaming, travel and entertainment, and the casino industry’s new-found mega-margins.
In addition, they still have unique qualities that should make them good investments into the foreseeable future.
MONARCH CASINO
Let’s start with the most conservative of the three, Monarch.
This is a simple story. Monarch is earning far more than it spends. Profits are driven by its fast-growing Reno and Denver markets and being hyper-fueled in Colorado by the completion of destination quality resort Monarch Black Hawk, combined with that state ending bet limits and allowing a full range of table games such as baccarat and pai gow.
Long-term debt is $68 million and cash on hand in the last quarter was $33.5 million. Forecast EBITDA is $152 million this year and $161 million next year, according to David Katz of Jefferies.
It doesn’t take much math skill to see that Monarch will soon be debt-free and piling up cash.
CEO John Farahi is searching for his next growth opportunity now that Black Hawk is complete. He’s very conservative and that could take years. Meanwhile, all that cash generation on under 19 million shares is the definition of a cash cow.
GOLDEN ENTERTAINMENT
Golden knows what it has. That was clear on its fourth quarter conference call when CEO Blake Sartini repeatedly emphasized his strategy of realizing the potential of existing assets.
Simply, Golden is hyper-local in southern Nevada, capitalizing on the region’s continuing population growth and building up performance from the historic underperformance of its casinos under previous ownerships.
Its Las Vegas Strip resort, the Strat, is an example, growing revenues in the casino, from dining and entertainment, and raising hotel room rates to the level of mid-market Strip competitors as it adds Strip quality amenities.
Part of the story is growth through increments. Golden is starting a series of concerts in Laughlin. Each can lift EBITDA by $1 million or $2 million. Golden will resume building new taverns in Las Vegas. Each tavern adds $700,000 in EBITDA on average. Every dollar of room rate at the Strat falls to the bottom line. A planned refinancing should save $15 million in interest expense.
Add it all up and you get $300 million or more of growing EBITDA with just $40 million to $45 million of capex.
Like Monarch, that means cash piling higher. The company is putting that cash into share repurchases, cutting debt to further grow cash flow in a virtuous circle, and perhaps special dividends.
Finally, Nevada’s largest slot route operator is lobbying in several large states to legalize slot routes, thus potentially opening significant new markets.
CAESARS ENTERTAINMENT
Saving the biggest for last, all one has to do to understand what Caesars can achieve is to listen to CEO Tom Reeg’s long history told on his fourth quarter earnings conference call.
An impassioned Reeg described in detail how Eldorado Resorts exceeded financial targets on every acquisition since it went public in acquiring MTR Gaming in 2014 through to its 2021 merger with Caesars, despite the nay-saying of critics.
The history lesson was a build up to his promise that digital gaming will return over 50 percent on investment at maturity in 2024.
Investors have gone from being overly optimistic to “unlimited bearishness” on digital gaming, yet nothing has changed at Caesars, except it has achieved market share targets sooner than expected and will immediately curtail advertising in existing markets, dramatically reducing costs, Reeg said.
In brief, Caesars will capitalize on the biggest opportunity for the gaming industry in 30 years, Reeg said.
Then there is the brick-and-mortar business, which he expects will get a 15 percent return on $1.3 billion in capital projects, benefit from the COVID recovery, gain hotel pricing power when about 25 percent of room capacity is removed by Las Vegas property sales that will also fund debt reduction.
“We put out targets because we know we will meet them and exceed them,” Reeg said.
A final note: the Triple Play companies still benefit from their founding families, the Caranos at Caesars, the Sartinis at Golden and the Farahis at Monarch.
Their pride in their enterprises and large stock holdings provide a commitment from the top that is matched by few companies.
