With interest rates rising and inflation soaring, companies’ ability to generate free cash flow (FCF) is all the more important. The gaming industry is home to several that are answering that call.
In a note to clients today, Roth Capital analyst Edward Engel highlights several gaming equities offering a combination of exposure to resilient regional demand trends and strong FCF-generating capabilities. Those include Century Casinos (NASDAQ:CNTY), Everi (NYSE:EVRI), and Golden Entertainment (NASDAQ:GDEN).
As the pandemic continues to fade, we see late-recovery themes overpowering headwinds related to inflation and higher interest rates, where Gaming demand proved resilient last decade throughout several choppy environments,” said Engel. “We also believe attractive FCF yields can offer floors to valuations, with potential for meaningful upside as market conditions stabilize.”
The analyst has “buy” ratings on regional casino operators Century and Golden, as well as on gaming machine manufacturer and fintech purveyor Everi.
Century, Golden Tapping Into Regional Strength
Las Vegas-based Golden operates 10 casinos, nine of which are in Southern Nevada, including the Strat. But none of those venues are considered Strip properties.
Rather, the bulk of Golden’s business is derived from the Las Vegas locals market, including retirees and staffers from other gaming companies. The exposure to older gamblers is a plus, and gaming equity could generate a FCF yield of 12% to 13%, notes Roth’s Engel.
“GDEN’s exposure to 65+ demographics and the LV Strip offer strong late recovery themes that should overpower inflationary headwinds,” says the analyst. “While inflation appears to be curtailing consumer spending in some categories across the US, gaming demands appears resilient, while LV Strip operators are benefiting from higher prices by flexing room rates.”
As for Century, that operator has no Las Vegas footprint. In February, it said it’s paying $195 million for the Nugget Sparks casino – marking its initial entry into Nevada.
“CNTY trades at an 11% yield to 2022E FCF and 8% to 2023E (peak CapEx year),” adds Engel. “1Q22 has proven resilient, with Missouri reported GGR +1% QoQ and West Virginia GGR +2%. We also expect Poland and Canada to show further sequential improvement in 1Q, particularly Poland which we see surprising to the upside.”
Colorado-based Century is believed to be shopping its two-thirds stake in Casinos Poland.
Bullish on Everi, Too
What’s expected to be a robust slot replacement cycle and continued adoption of cashless gaming are among the drivers of Everi’s impressive FCF story.
A major part of the Everi investment thesis is the company’s fintech offerings, and that’s underpinned by the move to cashless gaming at casinos across the country — one sped along by the coronavirus pandemic.
“Meanwhile, we believe the slot replacement cycle is reaccelerating independently of economic conditions, where gaming operators are guiding meaningful rebounds in maintenance CapEx for 2022 (+30-40%),” concludes Engel.
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