Note: Subscribers to our SA premium site The House Edge had a 36-hour advance look at this research.
"The techniques I developed for studying turbulence, like weather, also apply to the stock market…" - Benoit Mandelbrot, Mathematician
While much white hot trading frenzy followed Macau and Las Vegas-centric gaming shares during 2016, US regional gaming stocks also moved ahead, yet below the radar screen of many investors. Between an improving texture to the recovery of gaming win in most US markets served by this group and a growing trend toward REIT conversion or consolidation, there were catalysts aplenty for investors to consider. We covered US regionals big and small last year believing that some of the smaller, near invisible low-cap companies had propulsion.
Here's a capsule of what happened to just two:
Last October 31, we looked at Century Casinos (NASDAQ:CNTY), an operator with an interesting spread of properties in the US, Canada and Poland. At $6.40 a share it looked underpriced to us relative to its solid management focus, good performance and prospects going forward. At the last close the stock was $8.23, $1.83 a share higher or a gain of nearly 29%. Its price at writing was very attractive to either traders or long-term investors. It clearly enabled retail investors to participate. The company had lots of fans among institutions who have thus far stayed long.
Runway: We've looked at Century since that call. So for believers in the Century story we presented there's a nice choice: There's money to be taken off the table now or, as we believe, there's runway left for this stock. There's expansion in its Edmonton, Canada, casino due to what we see as an upside move on Alberta's energy-based economy and stability in Poland.
Consensus analyst estimate: The next earnings call is due late March. Until then the latest analyst target is $8.25 putting the trade now just about at target. We demur, sensing the same rationale that placed the stock in our cross hairs back last October still prevails. Behind it is an improving economic tailwind we see forming in the markets Century serves. For that reason we are lifting our call to $12 before the end of Q2 this year.
Full House Resorts, Inc. (NASDAQ: FLL)
This nifty little company was so far below the radar screen that a more accurate descriptor might have been below the Sonar screen.
Our interest in this company arose when we heard that a former colleague and industry acquaintance was joining management. Daniel R. Lee is the former CFO of Mirage Resorts, Inc. while it was still owned by Steve Wynn. Dan had also been one of the key first team investment bankers I worked with back in 1991 when I was part of the senior executive team at Donald J. Trump's Atlantic City Taj Mahal, working through to a prepackaged bankruptcy that proved highly successful.
Dan had also been CEO of Pinnacle Entertainment, Inc. (NYSE:PNK), so he had a large canvas viewpoint he would now employ when he was tapped to lead a shareholder rebellion against the then failing Full House management. My sense was that he would quickly drain the swamp as it were of ineffective management and marketing programs, put capex toward improving existing properties, restructure finances to complete a plan to acquire Bronco Billy's casino property in Boulder Colorado.
On April 21 last Full House was trading at $1.50. To me, knowing Dan, sensing he had a larger future in mind for the company than that which was apparent to the market, I recommended the stock to SA readers at that price. My thinking was largely guided by what I believed to be the mispricing of the shares and the opportunity afforded everyday investors to acquire a decent sized position. Even a modest upside, I reasoned, could produce a nice return.
Price at our writing April 21: $1.50
Price at closing last week: $2.20
Gain: 70c a share or 47% since last April.
Thus as an example: A 5,000-share position acquired last April at $7,500 trades today at $11,000, yielding $3,500 to take off the table right now. But we think Full House has lots of runway left.
Note: In between Full House completed a rights offering of approximately 3,800,000 shares. There was some concern among shareholders about dilution and the position of Lee personally. To assuage these doubts, Lee pledged to kick in any shortfall of the offering up to $1 million out of his personal funds. It proved unnecessary since the offering was quickly oversubscribed. It yielded $5 million which is being used to reinvest and expand company properties to materially enhance patron convenience and build a diversity of new non-gaming assets.
We think the capex will begin to show returns by Q2 this year. We also believe, and this is a personal take only, that Lee has his eye longer range, on a bigger prize, namely either a merger, more acquisitions, or even possibly a sale to a large regional operator. We sense there is a transaction somewhere in the Full House future.
For these reasons we think that the stock has some considerable runway left this year and call it to move to $3.25 by Q2 this year.
This is now a solid little company with a lot of pathways to a bigger future headed by a CEO with large cap gaming company experience.
This is the first in a series of articles we hope to present to SA readers about the US regional gaming space, where we believe bargains abound. The stocks discussed here offer the best of all worlds to retail or institutional investors who are already holders:
1. Take money off the table now, watch the stock and re-enter if there is a dip along the way. Longer term there's much more upside here than where the trade now sits.
2. Stay long in the stock or accumulate steadily before earnings are published late March. This is a belief in the fundamentals underlying these stocks. They suggest a much more generous valuation because we believe they lack broader visibility in the sector due to their size, capitalization and investor reticence about buying into low priced stocks in the casino sector.
3. We have evaluated trends in gaming win in the core 10 states where the highest percentage of casino properties operated by public companies are located. We like what we see in the Midwest and mountain west, some spots in the south and in secondary Nevada markets. We also looked at the overall regional space in terms of transactions waiting to happen based on 2016 events.
We see more coming down the road because the economics of consolidation make so much sense.
The US market currently has over 1,000 total casinos including commercial and Tribal. The total revenues will reach close to $69 to $70 billion this year. There are few underserved markets left for large scale operators. Most of the major operators like Wynn Resorts, Ltd. (NASDAQ:WYNN), Las Vegas and Massachusetts, MGM Resorts International (NYSE:MGM), Massachusetts, and recently opened National Harbor - the last of which is already soaring with record visitation even though it has not yet been open one month.
There are areas like the state of Georgia, where lobbying activity for an integrated resort in metro Atlanta is afoot. For the most part supply and demand are in balance. That produces we believe, a compression to rationalize costs, financing capex needed on legacy properties, consider unlocking shareholder value with REITs, etc.
All this spells transactions in our view and the small caps indicated here are high percentage potential participants.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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