PlayAGS Slides on Earnings Miss, Analyst Sees Brighter Days Ahead

Posted on: March 11, 2022, 08:01h. 

Last updated on: March 11, 2022, 10:53h.

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

Shares of gaming supplier PlayAGS (NYSE:AGS) are off 10% in early trading after the company’s fourth-quarter loss was wider than expected. But some analysts see reasons to be optimistic about the stock.

PlayAGS
A slide from a PlayAGS earnings presentation. The stock is sliding today, but analysts remain bullish. (Image: Seeking Alpha)

The Las Vegas-based slot machine manufacturer said it lost 25 cents a share on sales of $70.22 million in the last three months of 2021. Wall Street expected a loss of eight cents on revenue of $69.08 million. PlayAGS pre-announced earnings before interest, taxes, depreciation and amortization (EBITDA) for the quarter in January, so there weren’t surprises on that front.

The stock is widely viewed as inexpensive, a condition likely to persist amid the drubbing it’s incurring in the early part of Friday’s trading session.

We continue to believe AGS stock multiple does not reflect above. AGS trades for 5.7x/4.6x CY22E/CY23E EV/EBITDA versus supplier peers at 9.5x/8.5x. At supplier CY23E EV/EBITDA averages, shares would trade at $24, over 200% higher than yesterday’s (3/10) close,” said B. Riley analyst David Bain in a note to clients today.

He reiterates a “buy” rating on PlayAGS, while trimming his price target to $18 from 21. The new forecast is still more than double where the stock closed on March 10.

PlayAGS Sporting ‘Punitive’ Discount

The medium- to long-term PlayAGS investment thesis is likely to be 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.

For now, it’s a deeply discounted stock — something that’s often hard to come by in the small-cap space, and currently hard to find in the broader domestic equity landscape. While valuation alone isn’t a reason to buy or sell a stock, B. Riley’s Bain describes the discount PlayAGS is enduring relative to rivals as “punitive.”

“Even at 6x CY23 EV/EBITDA, however, a ~30% discount to peers implies shares would trade at $14 or 75% higher,” adds the analyst. “While even a significant discounted valuation yields a large share price gain, we argue such discount is overly punitive, given company-specific trends/share gains and its pure-play profile in a period of expanded casino buying.”

Enhancing the allure of the PlayAGS thesis is the company’s recently completed debt financing, which saves $10 million in annual interest expenses, aiding in its quest to get to net leverage of 4x this year.

Casino Particulars

The share of PlayAGS premium slots at casinos across the US doubled year-over-year in the fourth quarter. As Bain points out, the supplier is gaining more traction with commercial operators, adding diversification to what’s traditionally a tribal gaming-heavy customer base.

Table game shufflers could also be a longer-ranging catalyst for the shares.

“We continue to believe AGS’s second shuffler could prove significant, as now AGS offers a ‘line’ of shufflers across different table configurations, rather than one shuffler product,” notes Bain. “We believe AGS is the only true alternative to a competitor’s high-priced legal table shuffler ‘monopoly,’ and believe additional shuffler lines from AGS will be released over time.”