Posted on: April 4, 2022, 09:01h. 

Last updated on: April 4, 2022, 09:01h.

In what’s been a trying start to 2022 for the broader gaming equities complex, some regional casino operators are standing out and they have something in common: Ability to generate free cash flow (FCF).

regional casino
Golden Entertainment’s Strat Las Vegas. An analyst likes the operators free cash flow potential. (Image: Twitter)

Operators with sturdy balance sheets and impressive FCF-generating capabilities include Century Casinos (NASDAQ:CNTY) and Golden Entertainment (NASDAQ:GDEN). In a note to clients today, Roth Capital analyst Edward Engel highlights that pair of regional casino equities, among others.

Regional gaming stocks with attractive FCF yields have been relative outperformers in 2022, and we expect this outperformance to continue amid an uncertain macro environment,” said the analyst.

Engel notes that the current climate isn’t comparable to the second-half of 2018 when gaming equities tumbled amid investors’ fears of rising interest rates. This time around, investors likely understand the improving gross gaming revenue (GGR) story offered by regional operators and the potential for 2022 GGR data to surprise to the upside, he adds.

Century, Golden Among Cream of FCF Crop

Engel has “buy” ratings on Colorado-based Century and Strat owner Golden Entertainment. The former sports an FCF yield of 15 percent — 20 percent excluding capital spending — while the latter yields a tidy 12 percent on an FCF basis.

In February, Century said it’s paying $195 million for the Nugget Sparks casino and a 50 percent interest in the real estate company that owns the gaming venue. That’s providing the operator with an entry into Nevada and the move is largely praised by analysts.

For its part, Golden is an impressive FCF/shareholder rewards story. On its current free cash flow trajectory, it’s possible Golden will generate approximately $200 million in cash this year — more than 10% of its market capitalization — for share repurchases. In the final three months of 2021, the casino operator bought back $10.6 million of its stock. The bulk of Golden’s portfolio are Nevada casinos frequented by locals and the operator has no near-term new project risk.

“Another key difference vs 2H18 is financial leverage, where both balance sheets and FCF profiles have improved materially. Prior to the pandemic, 4-5x net debt to EBITDA was considered ‘normal’, but leverage profiles have now moderated to 2-3x,” adds Engel. “Meanwhile, several operators such as GDEN are now harvesting FCF after major CapEx initiatives last decade.”

Cautious on Penn

Penn National Gaming (NASDAQ:PENN) is the largest regional casino operator in the US and its land-based gaming operations are expected to generate a free cash yield of 11 percent, but Engel is cautious on the name.

The analyst lowers his price target on Penn to $46 from $51 with a “neutral” grade, implying only modest upside from the April 1 close around $42. He says that target includes $20 of value ascribed to the operator’s online business.

He also reiterates a “buy” rating on Full House Resorts (NASDAQ:FLL) with a $16 price forecast. That’s more than 60 percent above current levels.



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