FANTINI ’ S FINANCE
Little Giants
Several small-cap companies offer value in a bear market
BY FRANK FANTINI
Discussion on investing in gaming stocks is dominated by the names of the largest companies such as MGM , Caesars , Wynn , Las Vegas Sands , Aristocrat , Light & Wonder , and in emerging digital gaming , the likes of DraftKings and Evolution .
That is understandable . They have tons of information available , in news and from analysts . There is a lot of stock to be purchased — an essential for institutional investors , who , after all , drive stock prices . The focus also is totally appropriate given the security provided by long histories of proven performance and the fact that the best long-term returns in nearly all industries come from the biggest and the best companies .
But in what has been a small-cap bear market , there are some stocks that can potentially provide double-barreled returns of both earnings growth and higher valuations . Of course , small stocks generally are riskier than big ones , but for those looking for outsized gains , here are three interesting names :
• AGS CEO David Lopez probably said it best : His company ’ s success will be built upon products , people and process .
AGS has long had a strong people-oriented culture . Its product line is growing , but products have not been its problem . The issue has been managing the company to improve the bottom line . Now , that process part is performing admirably . In the last quarter , AGS not only grew revenues around 15 percent , it grew EBITDA at that rate , too . Further , its debt burden is fast becoming a non-issue as AGS has brought its leverage ratio down to 3.2 times on its way to below three times by year-end . All the while , it is maintaining its R & D budget to assure a flow of new products .
The potential for the $ 350 million market cap company is obvious . Slots , which still provide 90 percent of revenues , are growing around 15 percent at EBITDA margins of around 45 percent . Table game and interactive divisions are growing even faster . Indeed , little AGS is fast be- coming not-so-little given its product and jurisdictional expansions .
The growing popularity of its products has been documented , as in the Eilers-Fantini surveys that show AGS gaining ground throughout its business . In fact , AGS was cited by Eilers & Krejick Gaming at the firm ’ s annual awards program as the industry ’ s most improved supplier in core products .
Yet , for all of these strengths , AGS stock sells for only five times next year ’ s estimated enterprise value-to-EBITDA . Imagine what happens to the stock price when it reflects growing profits with commensurate valuation .
• Full House Resorts historically is a footnote of a company with EBITDA around $ 40 million a year and properties that would make a yawn exciting .
That is changing . The company has opened two unique properties that promise to be transformational . In Cripple Creek , Colorado , the $ 300 million Chamonix casino is the first resort-quality property in the market . In Waukegan , Illinois , FLL has opened a temporary American Place casino that , when the permanent property is developed , will be a $ 500 million , upscale operation with all of Chicagoland to draw from and a lock on a neighboring affluent locals market of 1 million people .
CEO Dan Lee says the two properties should combine for $ 100 million in EBITDA and the company as a whole $ 130 million . That ’ s triple FLL ’ s norm . But performance likely will be better . Fifteen percent returns on investment would yield $ 120 million from those two properties alone ; 20 percent would generate $ 160 million . And there is growth potential in the company ’ s other properties . In other words , a tripling , quadrupling or even more of EBITDA over time is not out of the question .
FLL has been penalized because Chamonix and American Place have gotten off to slow starts . Chamonix especially has been marred by property opening glitches . An investment in Full House is a vote that those properties will provide significant returns , even if just extra-base hits and not home runs .
Investors also have been wary of debt , noting the company still has to finance the permanent American Place . However , Lee and CFO Lewis Fanger described in detail during the fourth-quarter investor call how American Place debt should be under $ 200 million and will not be needed for a couple of years , by which time growing cash flows with further strengthen the balance sheet .
• Inspired Entertainment may be the least known company with a lead position in potentially a huge product line — virtual sports wagering .
If the global sports betting market reaches $ 80 billion , as many expect , and virtual sports betting maintains its historical position of 10 percent of that , the size of the market is clear for a company with a market cap around $ 250 million . And margins are ridiculous . In the third quarter , Inspired generated $ 11.7 million in EBITDA on $ 13.4 million of virtual sports revenue .
Inspired has other potentially huge growth markets — VLTs in the U . S ., the success of its Vantage cabinet that is growing revenues double digits from earlier-generation cabinets it replaces , iLottery , and international expansion , such as Brazil . In other words , Inspired has a lot of potential . The story of all three of these companies is the same as for any so-called story stock . They have to produce . Or , as Inspired CEO Brooks Pierce said on his recent investor call in regards to virtual sports , the coming year will be one to put up or shut up .
The good news is that even if they fall short , they could find a market of buyers ready to scarf them up . What would a larger company pay for Inspired and its virtual sports and iLottery products ? Or a casino operator to own Chamonix and American Place ? Or for AGS and its ever-growing product line ?
Well above their current prices , I should guess .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business APRIL 2024