As prudent investors scour the markets for growth opportunities buoyed by strong cash flow, it's clear that Full House Resorts (FLL) meets the standard for interest. After a simple review of the company's general state of being it can be additionally argued that FLL may be undervalued. Analyst Dan Foley states simply, "FLL is the Danaher Corp. (DHR) of the gaming space," making the direct comparison to DHR which has consistently acquired high cash flow businesses where afterwards management leverages their operational expertise to enhance margins and organically grow the acquired business. "Full House management has over the last three years embarked upon a similar growth strategy and the fruits of the company's effort are beginning to blossom."
Foley's suggestion comes from a verifiable point of credibility, as he previously served at MGM Resorts International (MGM) and Harrah's Entertainment (now Caesars Entertainment (CZR) as head of Investor Relations and part of the Corporate Finance Departments.
"I see Full House as an underappreciated, transformative growth story with strong, free cash flow, expanding margins, low leverage, and a clear path to continued growth," stated Foley. "In fact, FLL is a rapidly expanding, under-the-radar, regional gaming player, and has become a super-cheap and unappreciated version of Ameristar Casinos Inc. (ASCA), Isle of Capri Casinos, Inc. (ISLE), Pinnacle Entertainment Inc. (PNK), and Penn National Gaming Inc. (PENN)." But the comparisons stops there. While ASCA, ISLE, PNK and PENN struggle to find growth given the current base of revenues and lack of viable large scale gaming expansion opportunities, Full House is coming off an extremely small base of revenues and EBITDA and has acquired and identified numerous underperforming or undercapitalized regional destination resort gaming anchored assets where opportunities exist to expand and/or enhance operating efficiency. Foley believes this is a potent business plan that could deliver double digit revenue and EBITDA growth over the next several years.
The low leverage on the enterprise, at less than 2x, net of cash, post the Silver Slipper acquisition, also ensures that a tremendous amount of free cash flow will flow back to the company for further expansion or improvements to the existing asset base. Foley further stated,
Regional peers have significantly more leverage when compared to Full House. Because of FLL fiscal discipline over the last several years through the downturn of '08/'09, Full House is poised to take advantage of tremendous growth opportunities and scoop up underperforming and improperly positioned assets.
Despite the tough economy and operating environment over the last four years, Full House has made tremendous progress, growing from a small regional manager and owner of resorts to a mid to large sized owner with Rising Star in Indiana and the impending purchase of Silver Slipper on the Mississippi Gulf Coast. With its track record of successes in managing casinos such as Fire Keepers in Michigan and its tremendous margin improvement of the Rising Star in Indiana, the Silver Slipper acquisition with its large base of current customers and expansion potential should present the next rung in the ladder of growth. Investors should also draw comfort from the fact that this won't be FLL's first foray into full control of a destination resort, instead, it now has the pedigree of the Rising Star model and a management team far past their first gaming rodeo.
Foley's bullishness toward Full House is supported by a cadre of indicators that he believes will propel the company going forward, assuming continued success in execution and no unforeseen changes to market conditions:
· A cost focused / operations focused management team with many decades of combined casino operations and management experience all over the United States.
· The company is consistently growing revenues and EBITDA by carefully harvesting old management contracts and investments and investing in larger more proven and consistent cash flowing properties and additional management contracts such as Buffalo Thunder in New Mexico.
· The company has active brokerage coverage, but is still an undiscovered story by most institutional money managers. This is likely to change as the current brokerage houses and future covering brokers recognize the growth profile and superb management team in place.
· The company was able to pay off the debt from both the Stockman's Casino purchase, in 2007, and the Rising Sun acquisition, in 2010, in less than two years, which indicates a strong possibility that FLL will quickly de-lever post the Silver Slipper acquisition.
· The company has acquired two large regional properties at very low multiples; around 5.00x for Rising Sun Indiana and 6.25x for the Silver Slipper in Indiana, below the average multiple of current regional operators indicating that management is extremely diligent when deploying shareholder capital.
· On a backward looking basis the Rising Sun which generated nearly $11 million in EBITDA in the trailing twelve months period was purchased for closer to 4.00x. When factoring in expansion opportunities at the Silver Slipper, Foley estimates the backward looking multiple to drop a full turn, similar to the Rising Sun.
· Rising Sun's margins have expanded during FLL's ownership and while new competition is expected, once the Horseshoe in Cincinnati opens, the management team will keep a close eye on expenses and margins. In addition, Rising Sun is located in an area that will appeal to the current customer base which might be reticent to travel to central Cincinnati to enjoy a similar and in some cases inferior entertainment experience.
· The company generates high margin revenue from hybrid ownership/management contracts from the Hyatt Regency Hotel in Lake Tahoe, Nevada and the Buffalo Thunder Casino Native American Pueblo of Pojoaque near Santa Fe, New Mexico.
· Foley estimates that pro-forma for the acquisition of the Silver Slipper and post acquisition synergies FLL will generate, on a yearly basis, nearly $170 million in revenues and $23 million in EBITDA with leverage of under 2.0x and intriguing additional growth opportunities.
· Foley's estimates would represent a CAGR on revenue and EBITDA of 56% and 15%, respectively from 2009 - 2013. An impressive growth rate compared to any regional peer or even global gaming enterprise such as LVS, WYNN or MGM.
· Foley estimates that pro-forma for the acquisition of the Silver Slipper FLL stock is trading at 3.2x forward EV/EBITDA versus regional peers ASCA at 7.0x, ISLE at 6.5x, PNK at 7.5x and PENN at 6.5x
While daily trading volume is low by institutional investor standards, especially those institutions concerned with trading liquidity, individual investors have a unique opportunity to acquire an under the radar, fast-growing gaming operator. Foley believes FLL house may be the next MGAM. Once institutional investors realized the growth potential of Multimedia Games, which put in place a stellar management team with a focus on growth not dissimilar to FLL, the stock appreciated rapidly.
Indeed, assimilating all the facts, there is little rationale for FLL to be trading at less than half the multiple of its regional peers given its recent growth and growth prospects. In fact, it seems that as the market becomes more aware of FLL's considerable achievement in the space to date, and with a strong opportunity in Mississippi, a better share price awaits.
Disclaimer: Statements herein may contain forward-looking statements and are subject to significant risks and uncertainties affecting results. The authors provide no assurance as to the subject company's plans or ability to effect proposed actions and cannot project capabilities, intent, resources, or experience. The subject companies haven't always approved the statements made in this report. This report is neither a solicitation to buy nor offer to sell securities and is for information purposes only and shouldn't be used as basis for any investment decisions. Kurt Divich, Dan Foley and Integrity Investor Relations, a division of Integrity Media Inc. isn't an investment advisor, analyst or licensed broker dealer and this report isn't investment advice. IMI has not been compensated by any company referenced herein for this editorial.