Golden Entertainment Seen as Defensive Play Among Casino Stocks

Posted on: November 4, 2022, 12:46h. 

Last updated on: November 10, 2022, 01:52h.

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

It’s been a volatile year for casino stocks, confirming the utility of equities with defensive traits. Some analysts believe Golden Entertainment (NASDAQ: GDEN) fits that bill.

casino stocks
An Arizona Charlie’s casino in Las Vegas. An analyst says operator Golden Entertainment is a defensive idea among casino stocks. (Image: Vegas Means Business)

On Thursday, the Strat operator said it earned 45 cents a share on sales of $279 million from July through September. It noted its quarterly results continue to outpace those notched in 2019 — the last year before the onset of the coronavirus pandemic.

In August, Golden announced the sale of its Rocky Gap Casino Resort in Flinstone, Md., meaning its portfolio will eventually consist entirely of venues in Southern Nevada. That might not be bad, as highlighted by strong data in the operator’s Las Vegas locals segment.

Revenues for Nevada locals casinos were $37.7 million for the third quarter of 2022 compared to $38.1 million for the third quarter of 2021,” according to a statement. “Third quarter 2022 adjusted earnings before interest taxes, depreciation and amortization (EBITDA) was $16.8 million compared to $18.1 million for the third quarter of 2021. Adjusted EBITDA margin was 45% for the third quarter of 2022 compared to 48% for the third quarter of 2021.”

Golden and rivals with heavy Las Vegas locals exposure are noting on third-quarter earnings conference calls that, despite macroeconomic headwinds, customer spending remains healthy.

Golden Cutting Debt

At a time when market participants are fretting about the debt burdens of casino operators, Golden is giving Wall Street reasons to cheer because it’s paring its liabilities.

“We view GDEN as among the most defensive gaming stocks, where pro forma leverage is 2.2x while the company has no capital leases or major project CapEx initiatives,” wrote Roth Capital Analyst Edward Engel in a note to clients. “With low leverage and steady free cash flow, GDEN is applying FCF to repaying variable debt and consistent capital returns, where both accelerate in 2H23 after the Rocky Gap sale closes with ~$220M cash proceeds.”

The company trimmed debt by $25 million in the third quarter, reducing its outstanding obligations to $940.2 million. As of September 30, Golden had $177.7 million in cash and cash equivalents and $5 million in short-term cash. Cutting debt is an area of emphasis for the gaming company, but it’s possible shareholder rewards will remain part of the picture.

“While we expect the company to prioritize debt repayments over capital returns over the next few quarters, we see an opportunity for accelerated capital returns after the Rocky Gap sale, including a special dividend, recurring dividend, and/or accelerated buy-backs,” added Engel.

Golden Cheap Among Casino Stocks

Due to broad-based weakness in the casino stock complex this year, plenty of names are considered discounted relative to historical norms. According to Engel, Golden Entertainment checks that box.

“When adjusting for the sale of Rocky Gap, GDEN trades at 7.1x our 2023E EBITDA. This discount comes despite 90%+ of EBITDA coming from Southern Nevada, where RRR trades at 9.4x despite similar exposure,” concluded the analyst.

He rates Golden a “buy,” with a $53 price target, down from $55.