Making money in the aftermath of Las Vegas Massacre, with insights from a Local Hero and original Vegas Maverick.

Despite a pall cast on Mandalay Bay and Vegas, last October by the largest mass shooting in U.S history, the casino and entertainment business are regaining momentum.  The sector will likely benefit from the recent corporate tax cuts, higher employment, wages and stock market and surpass the very modest expectations of 1.2% growth for 2018 by industry experts.

We were in town with Michael Gaughan, who built Coast Casino’s and later sold to Boyd Resorts, an original Vegas trail blazer who took an $11 million stake to make over $ 1.1 billion operating and growing  casinos a little more than thirty-five years later.

Michael Gaughan and Robert Maltbie at South Point Hotel & Casino in Las Vegas* 

For insights into Vegas, past, present and future, I sat down with legendary local casino mogul: Michael Gaughan: 

Michael had modest beginnings, from a Military family from Nebraska, like Johnny Carson. They relocated to Las Vegas in the 40’s, he made an investment of $11 million in the 70’s and cashed out with over $1.1 billion a little more than thirty years later.
Gaughan relied on a very simple formula for success: treat your employees like gold and your customers like partners and show up every day. He was initially assisted by a wealthy patriarch along with Steve Wynn, who hasn’t fared too badly himself.

On The most influential people shaping Vegas: Steve Wynn, founder of eponymous Wynn Resorts, for his unworldly salesmanship and vision, and Kirk Kerkorian, owner of MGM and “father” of the mega-resort concept.

On the alleged killer, Stephen Paddock: Michael knew him as a customer, his South Point losses were significant, he was not on a banned
list for making money or his gambling prowess.

On impact of October Massacre:Michael will hire extra security guards in casinos and hotel entrances, but unlikely to effectively do a TSA like airport security screening due to the many entry ways in and out casinos and the negative psychological and business impact such measures would have.   
 

The October Shooting impact on the Vegas Economy:

The shooting and fewer available hotel rooms caused a fall in visitor volume for 2017, according to preliminary numbers released recently by the Las Vegas Convention and Visitors Authority. According to chief of research, Kevin Bagger. LVCVA statistics show 42.2 million people visited Las Vegas in 2017, a 1.7 percent drop compared to 2016. Hotel occupancy for 2017 was 88.7 percent, a drop of 0.4 points compared to last year. Also, the average daily room rate rose by 2.8 percent, and RevPAR (or revenue per available room) rose by 2.1 percent. Bagger also predicted visitor volume would increase modestly in 2018, rising by 1.2 percent. Visitor volume to Las Vegas dropped by 4.2 percent after the Oct. 1 shooting, according to numbers released by the LVCVA.

 Vegas Stocks Recover

In the aftermath, after a brief, swallow sell-off, casino related stocks, both large and small have powered higher with the strong stock market with no noticeable impact from the shooting. Even MGM, parent of Mandalay Bay has caught up with the S&P 500 up 11.54% vs 11.61% since Sept 29^th, 2017, the last trading day before the massacre.

 SPY(S&P500), vs MGM, Golden Ent. (GDEN) &, Full House (FLL). (chart below)

Our top pick in the casino group is Golden Entertainment Inc. (GDEN), run by Blake Sartini, a protégé of Michael Gaughan’s.  

About GDEN

Golden Entertainment is focused on distributed gaming, and casino and resort operations, (GDEN) caters to the local crowd in Vegas. The legacy company operates through two segments, Distributed Gaming and Casinos. The Casinos segment owns and operates 3 casinos, including Pahrump Nugget Hotel Casino that offers 453 gaming devices, 11 table games, a race and sports book, a 208-seat bingo facility, and a bowling center, as well as with 70 hotel rooms; Gold Town Casino with 238 gaming devices and a 125-seat bingo facility; and Lakeside Casino & RV Park with 190 gaming devices and a recreational vehicle park in Pahrump, Nevada. This segment also operates Rocky Gap casino resort with 662 gaming devices, 17 table games, 2 casino bars, 3 restaurants, a spa, and the Jack Nicklaus signature golf course in Flintstone, Maryland.

The distributed gaming segment had been doing the heavy lifting, pre-acquisition, comprising nearly 80% of revenues. The distributed gaming segment is involved in the installation, maintenance, and operation of gaming and amusement devices in non-casino locations, such as grocery stores, convenience stores, restaurants, bars, taverns, saloons, and liquor stores; and operation of branded taverns targeting local patrons primarily in the greater Las Vegas, Nevada metropolitan area. As of October 2017, its distributed gaming operations consisted of approximately 16,000 gaming devices in approximately 960 locations. Its branded taverns offer a casually upscale environment catering to local patrons offering food, beer and other alcoholic beverages and typically include 15 onsite gaming devices. GDEN operated 60 taverns, which offered approximately 850 onsite gaming devices. Most of its taverns are in the greater Las Vegas, Nevada, metropolitan area and cater to locals.

With the recent acquisition of American Casino & Entertainment Properties LLC for $850 million, which is accretive on a price to sales basis, GDEN will achieve more of a balance in revenue mix between distributed gaming and casinos and hotels, moving into 2018. The purpose of the transaction it to strengthen its market position in the local market and realize synergies that management believes can increase annual earnings by $18 million. American owns and operates four casino hotel properties in Nevada: The Stratosphere Casino, Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, and the Aquarius Casino Resort in Laughlin. As of October 2017, the American casino properties offered an aggregate of 3,865 slot machines, 89 table games and4,896 hotel rooms. The “new’ GDEN is expected to nearly double its revenues and eps. Over the next twelvemonths. This opportunistic acquisition is a game changer for GDEN and looks well timed with an accelerating US economy, rising employment, wages and benefiting from the government tax cuts just enacted that will increase net revenues.

Attractive relative valuation

GDEN is trading at lowest EV/EBITDA and PE ratio in its group and second lowest EV/Revenue estimates. This is based on wall street analysts estimates for 2018.

GDEN trades at a discount to group multiples of Price / Sales on trailing twelve months revenue (TTM) at 1.87 vs 3.38

Lack of coverage; only 2 firms covered GDEN before the January 2018 stock offering, now 3 cover GDEN with Jefferies initiating coverage with buy rating, concurrent with secondary stock offering.

Insider selling with large stock offering lead by Morgan Stanley, with the majority going to pay a portion of the recent American Casino acquisition. CEO Blake Sartini sold and Lyle Berman sold a small portion of holdings to diversify, but management still owns over 20%.

Catalyst: Golden Entertainment, Inc. (GDEN) was a big mover earlier in 2017, as its shares rose over 18% in one day. The move came after the company announced plans to acquire American Casino & Entertainment Properties LLC for $850 million.This acquisition is the catalyst behind synergies that has resulting in large increases in revenue and earnings growth in 2018. Revenues are expected to grow nearly 80% from $499 mil to $881 mil with eps more than doubling from .87 in 2017 to $1.87 in 2018.

Price target: $38 in 12 months based on 20x 2018 eps estimates of $1.87. This would give GDEN a multiple in line with the S&P 500 which is nor unreasonable based on expanding research coverage and growth expected in 2018.