PlayAGS Stock Valuation Disconnected from Strong Fundamentals, Says Analyst

Posted on: May 16, 2022, 08:51h. 

Last updated on: May 16, 2022, 10:16h.

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

Gaming supplier PlayAGS (NYSE:AGS) is joining related equities to the downside this year. But at least one analyst says retrenchment in the stock belies sturdy fundamentals.

PlayAGS stock
PlayAGS’s Orion upright slot cabinet. An analyst sees value in the stock. (Image: PlayAGS)

Following a meeting with management, Stifel analyst Jeffrey Stantial reiterates a “buy” rating on PlayAGS with a price target of $11, implying the stock can roughly double from current levels.

Commentary on demand trends and operator sentiment was encouraging, and suggests the replacement cycle recovery thesis remains intact despite macro fears,” writes Stantial in a note to clients. “Supply chain disruptions are a headwind, though management cited some ongoing moderation with recent actions (inventory build; increasing cabinet modularity) likely improving gross margin resiliency.”

The analyst adds PlayAGS has potential for sturdy long-term margin expansion as the company grows into what’s an impressive research and development profile.

PlayAGS Value Stock, Not Value Trap

With broader US equity benchmarks being drubbed this year, plenty of stocks look cheap. But some are value traps.

In the case of PlayAGS, the slot machine manufacturer appears to be offering credible value — so much so that Stifel’s Stantial argues the stock’s 20.32% year-to-date decline disconnects the name from what are strong fundamentals.

“Overall we continue to view AGS’s outsized discount to peers as more technicals/factor driven than anything else, with valuation yet to catch up to AGS’s improved fundamentals & earnings power,” notes the analyst.

That thesis is supported by a brisk pace of new installations and sales at regional and tribal casinos, as operators renew their focus on high-margin gaming opportunities. On the premium machine front, PlayAGS installed more than 1,000 premium leased units since the end of 2020, boosting its share of that market segment to 11% from 4%. Additionally, the Las Vegas-based company recently announced a debt refinancing that will save on annual interest expenses while aiding in the quest to drive net debt leverage to 4x.

Patience Could Be Virtue with PlayAGS

With the domestic gaming industry coming off its best first quarter revenue showing on record and signs that the momentum is trickling into the current quarter, investors are right to ponder why casino and supplier stocks are sagging.

Regarding slot manufacturers, there’s a bit of a lag from installation to bottom line benefit. But specific to PlayAGS, management indicates there are no signs that operators are dialing back purchases of gaming devices.

“Given management’s commentary here, and our sustained view that slot purchases should prove more resilient to a potential decline in consumer spending than feared given depressed slot reinvestment through COVID, we continue to view our constructive view on a slot replacement cycle recovery in 2022 as intact and justifying upside to AGS shares,” concludes Stantial.