Monarch Casino Offers Big Upside Potential in Post-Vaccine Landscape

Posted on: December 11, 2020, 10:40h. 

Last updated on: July 19, 2021, 01:13h.

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

Regional gaming company Monarch Casino & Resort (NASDAQ:MCRI) is a solid performer this year, jumping 11.10 percent amid a challenging operating environment. One analyst likes the upside offered by the name as vaccines come to market.

Monarch Casino
Monarch’s Atlantis in Reno, Nevada. An analyst is bullish on the stock, citing multiple tailwinds. (Image: Reno Gazette-Journal)

In a note to clients, Stifel analyst Steven Wieczynski restarts coverage of Monarch with a “buy” rating and a $63 price target, implying upside of 16.66 percent from the Dec. 10 close. He acknowledges that there’s some near-term risk with the stock, but adds investors should focus on the post-vaccine climate, where the operator is well-positioned.

With peer-low leverage, we believe MCRI is well-positioned for opportunistic mergers and acquisitions,” said Wieczynski. “While MCRI boasts a premium valuation, we see opportunity for further upside, as MCRI executes on one of the more compelling growth stories across our gaming coverage.”

Although casinos in Colorado and Nevada, where Monarch operates its two venues, are currently subject to capacity restrictions owing to a recent surge in coronavirus cases, the stock is higher by 6.73 percent over the past month.

Colorado Kicker

One of Monarch’s two properties is its namesake venue in Black Hawk, Colo. That is expected to become a vital driver of revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) as renovations are finalized.

The company’s Centennial State footprint is important for other reasons, including a growing sports betting market and the recent elimination of table game bet limits. On Election Day, voters there approved scrapping the $100 per hand cap at casinos in the state’s three gaming cities. It’s a move that also provides for the addition of new table games, such as baccarat and pai-gow tiles. As a result, analysts believe Colorado gaming venues will be able to attract a more affluent clientele, and perhaps keep more Denver-area gamblers in the state amid restrictions in Las Vegas.

“A changing Black Hawk market profile (more high-end rooms, more competitive table games, etc.) could see MCRI take more share from the Denver feeder market, particularly with some gamblers wary of flying to Las Vegas,” said Wieczynski.

The operator is nearing completion on the $360 million worth of enhancements to its Black Hawk property. Its other venue is the Atlantis in its home market of Reno, Nev.

Monarch’s Strong Fundamentals

Although Monarch trades at rich valuations relative to its peers, it commands those premiums due to strong fundamentals. This includes a 100 percent ownership of its real estate, meaning it has limited fixed costs and strong free cash flow prospects.

“We believe MCRI’s management team is one of the best in the business and well-aligned with shareholders,” notes Wieczynski.

His $63 price forecast on the shares is based on the name trading at 12x estimated 2022 adjusted EBITDA. That’s in line with Monarch’s historical range of 9x to 13x, and above the typical 7x to 11x for comparable gaming companies.