Full House: Every Business Has A Price At Which It's A Bargain

Jun.30.14 | About: Full House (FLL)

Ben Graham was likely the first to write about this investment thought.

Did Full House Resorts (NASDAQ:FLL) reach a bargain price, down 50% YTD? Underpeforming its Resort and Casino industry by 102.40% in 2013, last traded at 1.27 a fraction of its 4.07 book value. In addition, Full House sits at 10 year lows for valuations using P/B , P/S. Current share price is at 5 year low.

Full House Resorts, a casino gaming company owns, invests and provides management consulting services for other casinos. Native American and commercial clients rely on FLL's management expertise and industry knowledge.The company owns or operates the following: the Rising Star Casino Resort (Rising Sun, Indiana), Stockmans Casino (Fallon, Nevada), SilverSlipper Casino (Bay St. Louis,Mississippi), Grand Lodge Casino (Incline Village, Nevada), Buffalo Thunder Casino (Santa Fe, New Mexico).

Link to details on current operations.

Additional revenue generating activities also include full resort accommodations. Hotel/rooms, spas, pools, meeting spaces, food outlets, theater for concerts, golf course, clubhouses, high end restaurants, and other related services are available at owned or managed properties.

Does Full House Resorts' price drop reconcile with financial statement changes? Book value annual growth rates were 16.30% and 19.50% for the prior 10 and 5 year periods respectively. However, recent poor financial performance and uncertainty created by financial leverage weighs on the stock price. Then, on March 31, 2014 leverage ratio covenants were out of compliance, violated. Waivers were received from creditors. However, I can't know the potential impact on future access to debt that's needed to complete construction of Silver Slipper's Hotel. The low interest rate coverage of .41 and Z score 1.18 can't be overlooked as a current risk. But has the stock been oversold, creating an opportunity? More importantly, does less than expected results justify the 5 year low stock price?

FLL trades at a large discount to historical and industry averages for the following measures. Analysis of 61 Resort and Casino peers concluded FLL has the following mean reverting attributes.

Largest percentage drop from 52 week high, top 3 rank based percentage off historical high for P/B,industry's lowest P/B and P/S, 2nd lowest price to tangible book value, lowest 5 year, 3 year and 52 week stock returns.

Table below has useful historical financial results. It helps to quantify the size of valuation drop. Tangible assets were acquired with the related improvement in revenue. However, price valuation was more than cut in half from 2010 and as recently as 2013 for P/TB.

Additional data below highlights the 2013 drop in Z score.

Positive EBITDA and EBIT from 2008 shown in the table below. Large growing book and revenue per share with large stock price drop.

Note the large annual increase in gross profit and revenue per share coupled with the slight reduction in share count from 2008.

The table below shows large per share increase in assets (improvement and acquisition of operating assets) funded by retained earnings and debt. Financial results were impacted by recent historically harsh weather, negative regional gaming trends and increase competition in their Ohio/Indiana market. But, management commented during results reported May 2014. Current headwinds, tough operating environment will pass. Therefore, investment in existing and new casino assets is positioned to create large unexpected upside results. Obvious historic and industry low valuation indicates the market has no expectations for any positive news. This extreme low expectation may be creating an investment opportunity.

Industry exception, FLL, is reporting small positive insider activity. Insider ownership is 20.25%.

Click to enlarge

FLL is a risky investment. But may have significant upside from these prices.

Investors may be overlooking positive changes such as:

Substantial tax relief from the Rising Star facility; the amount is around $2.5 million per year starting in July 2014.

Aggressive cost containment at the reduced volume facilities. The reduced cost structure was $4.2 million over the same quarter a year ago. The expense savings will continue to accelerate.

New hotel tower at Rising Star in the North Star Tower is outperforming with weekend occupancies in a 90%-plus range.

Management estimated weather accounted for approximately $1.4 million of the reduction EBITDA during the quarter.

Investment opportunities, Kentucky provides great future growth potential.

Full House transformed from a management company into a regional operator of diversified quality assets.

Full House is comprised of long-tenured professionals in the gaming industry, with significant experience. This positions the company to leverage recent investments.

Construction on 142-room hotel tower at the Silver Slipper is expected for delivery in the first quarter of this year, or possibly early in the first quarter of next year.

To summarize data as of Friday 06/29/14.

Price = $1.27

Market Cap: 23.96M, Enterprise Value: 76.43M

Price/Sales: 0.18, Price/Book: 0.31

Enterprise Value/Revenue: 0.56, Enterprise Value/EBITDA: 5.71

Gross Profit: 63.39M, EBITDA: 13.39M

Total Cash: 14.52M, Total Cash Per Share: 0.77

Current Ratio: 2.10, Book Value Per Share: 4.07

Operating Cash Flow (ttm): 8.79M, Levered Free Cash Flow (ttm): 1.25M

52-Week Change: -52.61%

52-Week High (Jul 31, 2013): 3.05, 52-Week Low (Jun 27, 2014): 1.18

% Held by Insiders: 20.25%, % Held by Institutions: 37.70%

Short % of Float: 0.30%

Disclosure: Long FLL

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.