PlayAGS Stock Has Double Potential as Cash Flow, Installs Rise, Says Analyst

Posted on: October 27, 2021, 11:30h. 

Last updated on: October 27, 2021, 03:06h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

PlayAGS (NYSE:AGS) is soaring, ranking as one of Wednesday’s best-performing gaming equities. That’s after a sell-side analyst said the stock can more than double as the gaming supplier’s free cash flow (FCF) and installation base increase.

AGS stock
Two of PlayAGS’ machines, pictured above. PlayAGS shares are soaring. An analyst believes much more upside is on the way. (Image: PlayAGS)

In a note to clients today, B. Riley analyst David Bain reiterates a “buy” rating, with a $21 price target on PlayAGS. That forecast is more than two and a half times above the stock’s Oct. 26 closing price of $7.99. Bain’s note is sparking a rally in the maker of electronic gaming machines, with the shares up nine percent on above-average volume in midday trading.

We forecast 3Q21 to show AGS’ first sequential increase to its install base since 3Q19, and we forecast its participation win per unit exceeding 3Q19 levels by ~20 percent,” writes Bain. “We also raise our BH22/CY23 free cash flow (“FCF”) outlook by $2.2M per quarter/$8.6M per annum due to an expected 2Q22 refinancing.”

The analyst adds that the recently completed third quarter should be the sixth consecutive period in which AGS tops earnings before interest, taxes, depreciation and amortization (EBITDA) forecasts. The Las Vegas-based company reports September quarter results on Nov. 4.

Tribal Buying Could Be Big Catalyst for AGS Stock

The bulk of AGS customers are in Florida, Oklahoma, and Texas — the former two home to some of the largest tribal casinos in the US.

Additionally, PlayAGS stock is highly levered to strength in regional casinos, because 80 percent of its recurring revenue comes from those venues. Those are positives at a time when regional and tribal casinos are performing well, with help from pent-up demand. Bain says AGS’ third-quarter installation base should increase about 300 units from the second quarter, while notching a win per unit increase of 20 percent from the July through September period in 2019.

“Reasons for continued win strength include: 1) Core-market tailwinds (particularly OK, TX, FL); 2) Install base self-pruning/cleansing with increasing premium game introductions/placements; and 3) improving core game introduction momentum,” said the analyst.

Core Orion Curve — one of AGS’ higher-end products — and Aztec Chief, Captain Riches, and Lucky O’Reily are showing strong in-field results, according to Bain. The company only recently started penetrating the premium gaming machine market, potentially indicating that as it adds market share in that segment, the stock price could increase.

AGS Stock: Quiet Out-Performance

With a market value of $294.9 million, AGS stock is firmly in the small-cap territory, and that might be why it’s overlooked relative to some larger gaming names. Even with that, the shares are up 153 percent over the past year.

B. Riley’s Bain notes the company beat Wall Street earnings estimates in five consecutive quarters, with the upcoming report likely to mark the sixth such occasion. Plus, a case can be made that AGS offers some value — a rarity in today’s equity market.

“3Q21 should also mark AGS’ first sequential increase to its install base since 3Q19, and we forecast its participation win per unit exceeds 3Q19 levels by ~20%. Above, combined with increasing casino industry buying (AGS often considered a casino supplier ‘pure play’), offers potential for AGS shares to re-rate from its 43%/47% enterprise value/EBITDA discount to the supplier peer group, in our view,” concludes Bain.