PlayAGS Stock Has Double Potential, Says Roth Capital Analyst

Posted on: February 16, 2021, 09:31h. 

Last updated on: February 16, 2021, 12:27h.

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

PlayAGS (NYSE:AGS) stock is in rally mode Tuesday, after a sell-side analyst said shares of the gaming device manufacturer offer significant upside potential.

PlayAGS stocks
PlayAGS Las Vegas headquarters, seen here. An analyst says the stock could double. (Image: Las Vegas Review Journal)

On Tuesday, Roth Capital analyst David Bain reiterated a “buy” on the slot machine maker will lifting his 12-month price target to $14. That’s more than double where the stock currently resides, and nearly double the Wall Street consensus estimate of $7.28. It’s been about a year since PlayAGS traded above $10.

The analyst sees the company’s business stabilizing, while noting the shares trade at a noticeable discount to peers.

Moreover, a defined premium and potential late second half 2021 return to normalized casino slot-buying capex creates significant potential upside consensus,” said Bain.

“Without contemplating upside, however, AGS trades at a ~3 turn 2022 enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA) valuation discount to peers. We believe shares can double over the next 12 months,” he said.

While casinos scaled back slot-buying during the coronavirus pandemic, PlayAGS beat third-quarter earnings estimates. The company delivers fourth-quarter results next month.

PlayAGS Stock Could Thrive on Tribal Stability

PlayAGS is heavily reliant on tribal operators, particularly in Oklahoma, as revenue contributors. However, the company is less dependent on one-time sales than many of its peers.

Bain says the company’s structural stability is derived from 70 percent-plus recurring revenue from tribal clients. Those markets are less exposed to negative COVID-19 trends and restrictions, and offer stout organic growth. Additionally, data confirm game improvements are having a material, positive impact on PlayAGS.

“Checks cite continued win increases across its active base,” notes Bain. “Recall third-quarter 2020 active unit win was 16 percent-plus. While some improved performance is driven by strong host markets and pruning of lower-performing locations/units, better for sale and premium recurring game performance have also fueled gains.”

Familiar Catalysts, Attractive Valuation

As is the case with many operators, part of the thesis surrounding PlayAGS stock is resiliency in regional gaming markets. Bain says there’s opportunity for the company to make inroads in Colorado and Missouri.

“Regional casino resiliency, COVID vaccine roll-out, and recent earnings commentary combine for a potential return to casino capex normalcy by the end of 2021, offering significant upside to estimates,” said the analyst.

The stock trades at just 6.2x 2022 EV/EBITDA, compared to 9.3x for its peer group. If that valuation increases to 8x, it implies PlayAGS would trade at $13, according to Bain. He says a rebounding macroeconomic environment and game-specific catalysts could prompt valuation expansion, leading to upside for his PlayAGS forecast.