What’s one of the first words that comes to your mind when you hear the word “casino?”
If you said “bankruptcy”, we’d venture to say that you were in the majority. If you said craps, betting or slots, you might have a gambling problem. Yeah, yeah, we’re just kidding. But after all, we assume that since you are reading this, you do invest…and that can be a bit of a gamble in and of itself.
Of course, we’d prefer you NOT take a gamble on the sketchy investments. You know, the slots of stocks, pump and dumps, targets of promotion, TikTok stars, or whatever the flavor of the day might be on platforms like Stocktwits.
That’s why we are here, to cull out this noise for you.
Anyways, there’s a reason we brought up the casino theme here. We think we found a company operating in that very industry that is not like the rest. The ‘rest’ can mostly be summed up with that one word, bankruptcy, that we’d associate with the plight of the damned, like The Atlantic Club, Showboat Casino, Revel, Trump Plaza, Atlantis, and Sands, whose journeys are succinctly summed up nicely in this article, Failed Atlantic City Casinos. And yes, that is just Atlantic City.
While we won’t go into the various reasons why these casinos failed, we can say that we believe we’ve found a small anomaly of a company that is at least ripe for analysis. It’s in a profitable microcap company which engages in horse racing, card casino, food and beverage, and real estate development. It is domiciled in Shakopee, Minnesota and was founded in 1994. Our goal here is to figure out if we can justify looking at a casino stock, especially if we are going into hard economic times. On the surface, we like the way a potential bullish thesis could play out based on the company’s clean balance sheet and untapped revenue potential of its casino.
We’ve already covered the stock in a few portal notes, recently highlighting its breakthrough 2021 financial performance which has already bled through to the first quarter of 2021.
Please note that even though it appears that, based on Q1 2022 revenue, there are tough comps for the remainder of the year, a predictable seasonality appears to be the norm for the company. More specifically, ignoring 2020/2021 due to COVID-19, Q1 has been the lowest financial outing, followed by Q4, while Q2 is the company’s strongest quarter. Based on the data, we can extrapolate that the company will report 2022 revenues of ~$70 million and EPS of $1.82. This compares to revenue of $59 million in 2021 and EPS of $1.18. Applying a P/E of 15x on 2021’s earnings potential equates to a potential price target of $27.30.
So what’s the magic bullet here? Some might argue that we are already in a downward economic cycle, so what would make for the company’s 2021 a standout performance, and do people believe it is sustainable?
The chart below might give some indication of how people really feel about the sustainability of the company’s momentum.
May 16, 2022, the day of the company’s last quarterly report, marked the beginning of a steep 3-day 27% decline to $20.50 from $28.40, settling at an even steeper decline of 37.2% from its April 27, 2022 high water mark of $32.92. Prior to an upward spike of 50%, also evident below, we pegged the company as a research target at a price of $19.27 on March 20, 2022, the same day we were able to have a talk with company management.
Regrettably, we did not take part in the stock’s big move upward, but now that shares have fully retracted, we are wondering if we are being presented with a second chance. Especially now that we potentially have a defined price target to reference.
So, we will continue to monitor the company, since, as explained below, there seems to be some untapped potential.