Four for Four

Afew years ago, we published a research note titled “Nevada Triple Play” extolling the investment virtues of three family-controlled, Nevada-centric gaming companies—Eldorado Resorts, Monarch Casino and Golden Entertainment.

Later, we added a fourth, Full House Resorts, which, while neither a family company nor fully Nevada-focused, possessed many of the same strengths and opportunities. The stocks of all four companies have since soared, providing returns of several hundred percent each.

Since then, Eldorado has purchased Caesars Entertainment and changed its name to Caesars. Monarch and Golden have achieved much of the business potential we saw for them. Full House is still to play out.

So where do we stand on those companies today? We are still with them, though for reasons that vary as the businesses have changed, and recognizing that the returns of the past several years are unlikely to repeat for most over the next several. Here’s a fresh look at the quartet:

• Caesars has undergone the greatest transformation from its much, much smaller Reno beginnings.

The investment thesis: The same steadfast family control, a CEO in Tom Reeg focused perhaps like no other in the industry on the bottom line, and the potential of all of its large and varied assets—Las Vegas Strip resorts, regional casino network and 60 million-plus player database upon which to build a highly profitable online gaming and sports betting operation.

Given the prospect of generating EBITDAR approaching $5 billion in several years and an ever-improving balance sheet, it is likely that the stock will double in a reasonable amount of time from its recent $40 to $55 range, and then perhaps far more in the long-term.

Caesars sound bite: Size matters.

• Golden. With the sales this year of its Maryland casino and its slot routes business, Golden will become a pure play on the growth of southern Nevada.

The investor focus is on development of the

Strat in Las Vegas into a casino resort matching the revenue and profitability of would-be Strip peers like Circus Circus, Luxor and Excalibur, expanding the Las Vegas Valley tavern business to its stated goal of up to 100 units from today’s 64, developing its dominant Laughlin presence into a profitable and growing Las Vegas alternative and LV residents’ getaway, and maximizing returns of its locals casinos.

Achieving that should lift the stock from its recent $40-plus range to $60 or so, and even to near $80 if Golden receives the valuation multiples commensurate with its significant free cash flow and physical assets.

But in simplifying its business and generating more than $500 million from its Maryland and route sales, Golden has opened other possibilities.

The company will be positioned to grow. That could come through casino acquisitions. But it also could come in unconventional ways, such as extending the highly profitable tavern business (EBITDA exceeding $500,000 per unit) to other states, perhaps in partnership with Illinois-based J&J Ventures, which is buying its route business.

Golden could become an acquisition candidate itself. CEO and principal shareholder Blake Sartini was COO of Red Rock Resorts, whose chief shareholders, his brothers-in-law Frank and Lorenzo Fertitta, want to make their locals casino empire hyperlocal, including tavern development. Then again, a merger with another mid-size operator facing the same issues, say Monarch Casino, could make sense.

Finally, and perhaps most likely, Golden becomes a low-debt cash-generating machine returning capital to shareholders with special and recurring dividends and stock repurchases while Sartini and President-CFO Charles Protell search out expansion opportunities.

Golden sound bite: Optionality.

• Monarch Casino has come closest to achieving the potential we saw for it in Nevada Triple Play. While the stock might add another $10 or $20 or even $30 to its current $70s range, another fourbagger is unlikely.

And though CEO John Farahi is on the hunt

BY FRANK FANTINI

for an acquisition, one wonders if the uber-prudent businessman can find a property to match the mature Atlantis in Reno and soon-to-mature Monarch in Black Hawk, Colorado.

Aside from such an acquisition, the question is where the family-controlled company goes from here, especially with the Farahi brothers in their 70s. One possible answer is that John’s son Dan grows into greater responsibility. Another is that son and former COO David returns to take the helm.

For now, the debt-free company is sharing its growing mountain of cash with shareholders. Monarch recently announced a $5 a share special dividend and 30 cents-a-share quarterly dividend. Further dividend growth appears likely as the mountain rises.

One thing we know, John Farahi is an exceptional operations CEO and a man of utmost integrity and purpose. He will find the best route for shareholders.

Monarch sound bite: Free cash flow machine.

Full House Resorts reported disappointing fourth quarter earnings that caused the stock to sell off. Our response: Thank goodness. We were able to buy a few more shares at what should prove to be bargain prices.

The fourth quarter has virtually nothing to do with its outlook.

• Full House has new properties this year in Chicagoland and Cripple Creek, Colorado, that will triple the legacy $40 million or so in EBITDA in the foreseeable future and probably quadruple it over time.

Most analysts have target prices of $13 or $14 on the stock recently selling around $8. They are being conservative. A price of $20 in a year or so is more likely. And given the same valuation as peers, $25 and even $30 is credible in time. By then, always-imaginative CEO Dan Lee and his experienced management team are sure to have found new growth opportunities to pursue.

Full House sound bite: Growth, baby!

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.