Golden Entertainment is considered a defensive idea among casino stocks

Posted on: Nov 4, 2022 12:46 pm.

Last updated on: November 4, 2022 12:54 p.m.

It’s been a volatile year for casino stocks, confirming the usefulness of stocks with defensive characteristics. Some analysts believe Golden Entertainment (NASDAQ:GDEN) fits into that equation.

Casino Stocks
An Arizona Charlie’s casino in Las Vegas. One analyst says operator Golden Entertainment is a defensive idea among casino stocks. (Picture: Vegas means business)

On Thursday, the Strat operator said it earned 45 cents a share on revenue of $279 million for the July-September period. It noted that its quarterly results continue to beat those of 2019 — the last year before the outbreak of the coronavirus pandemic.

In August, Golden announced the sale of its Rocky Gap Casino Resort in Flinstone, Md., meaning its portfolio will ultimately consist entirely of Southern Nevada venues. That might not be a bad thing, according to strong data in the operator’s Las Vegas locals segment.

Nevada casino revenue was $37.7 million for the third quarter of 2022 compared to $38.1 million for the third quarter of 2021.” according to statement. “Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2022 were $16.8 million compared to $18.1 million for the third quarter of 2021. The adjusted EBITDA margin was 45% in the third quarter of 2022, compared to 48% in the third quarter of 2021.”

Golden and peers with a strong Las Vegas presence noted on third-quarter earnings calls that customer spending remains healthy despite macro headwinds.

Golden Cut Guilt

At a time when market participants are fretting over casino operators’ debt burden, Golden is giving Wall Street reason to cheer by reducing debt.

“We view GDEN as one of the most defensive gaming stocks, with pro forma leverage at 2.2x while the company has no capital leasing initiatives or large project CapEx initiatives,” wrote a Roth Capital analyst Edward Engel in a note to customers. “With low leverage and steady free cash flow, GDEN applies FCF to repay variable debt and steady returns on investments, both accelerating in 2H23 following the completion of the Rocky Gap sale with cash proceeds of ~$220 million.”

In the third quarter, the company reduced debt by $25 million and reduced its outstanding debt to $940.2 million. As of September 30, Golden had $177.7 million in cash and cash equivalents and $5 million in short-term cash. Debt reduction is a focus area for the gaming company, but potential shareholder rewards will remain part of the picture.

“Although we expect the Company to prioritize debt repayments over capital repayments over the next few quarters, following the sale of Rocky Gap, we see an opportunity for accelerated capital returns, including a special dividend, a recurring dividend and/or accelerated buybacks,” added Engel .

Golden cheap among casino stocks

Due to the casino stock complex’s broad-based weakness this year, many names are considered discounted compared to historical norms. According to Engel, Golden Entertainment ticks that box.

“Adjusting the sale of Rocky Gap, GDEN trades at 7.1 times our 2023E EBITDA. This discount comes despite over 90% of EBITDA coming from southern Nevada, where RRR trades at 9.4x despite similar exposures,” the analyst concluded.

He rates Golden a “buy” with a price target of $53 versus $55.

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