Jefferies: Monarch Casino Sees Attractive M&A Environment

• Analyst claims M&A could be “most likely avenue” for growth for operator after discussions with management
• Monarch management sees deep pool of potential opportunities
• The operator is frequently attached to takeover rumors, but hasn’t made a deal

Monarch Casino & Resort (NASDAQ: MCRI) is frequently mentioned as a potential buyer of other casinos and while the gaming company hasn’t announced a deal, one industry analyst has suggested that could soon change.

Jefferies analyst David Katz recently met with the Reno-based company’s management team, coming away viewing mergers and acquisitions (M&A) as “the preferred growth avenue,” citing a highly “attractive” environment in which Monarch could be a buyer of assets.

Management emphasized that identifying the next leg of step-function growth is the top priority. We left meetings with the view that M&A is the most likely avenue, though organic opportunities remain, particularly in Reno,” observes Katz.

Monarch runs just two casino hotels — the Atlantis in its home market of Reno and a namesake property in Black Hawk, Colo. — making it the smallest publicly traded casino operator by number of properties.

Diminutive roster aside, the stock is up nearly 45% over the past year, making it one of the best-performing equities in that span.

Good Time for Monarch Casino to Go Shopping

It’s a potentially good time for Monarch to be a buyer because it’s possible that fresh supply of regional gaming assets could be coming to market in the months ahead.

It’s possible regulators in some of the eight states in which Caesars and Golden Nugget both run casinos could force divestures, creating an attractive runway for prospective suitors.

It remains to be seen if Caesars is sold, if asset sales come to pass and if Monarch evaluates some of those opportunities, but it is clear Monarch executives are considering deals.

“Management believes the pool of external growth opportunities is the deepest it has been in the past five years,” adds Katz. “The preferred target profile is a holdco property in a growing economy with a stable regulatory environment.”

He rates the stock “hold” with a price target of $113.

Monarch Casino Will Be Choosy

Investors familiar with Monarch know at least two things regarding any consolidation plan. First, management won’t buy another casino simply to add size. Second, the company has a strict set of criteria that potential targets need to meet.

For example, it’s likely Monarch will only consider targets in which real estate is included in the deal and as Katz points out, the operator is likely to focus on markets “with population growth, competition, tax stability and price.”

Those standards could shrink the pool of potential Monarch targets, but the operator’s selectivity works in favor of investors as highlighted by the aforementioned share price appreciation.