Atomic Golf And Strategic Renovations Promise Growth Amidst Analysts' Gloomy Revenue Forecasts

Key Takeaways

• Introduction of Atomic Golf and enhanced entertainment strategies aim to increase foot traffic and profitability across venues, improving EBITDA margins.
  
• Significant debt repayment and a strong cash position suggest potential for increased capital returns to shareholders and property reinvestment.
  
• Strategic focus shifts and external pressures such as construction, labor costs, and new entertainment ventures pose significant risks to revenue and margins.

Catalysts

Owns and operates a diversified entertainment platform in the United States.

• The introduction of Atomic Golf is expected to increase foot traffic to the STRAT, which should boost casino, hotel, and ancillary revenues.
  
• Enhanced entertainment strategies, especially in Laughlin with a shift towards more profitable, smaller-scale events, are anticipated to bolster overall profitability and improve EBITDA margins.
  
• Strategic renovations at Arizona Charlie's Decatur, aimed to be completed by 2025, are anticipated to enrich the customer experience and drive higher occupancy rates, positively impacting revenue.
  
• The strength of the balance sheet highlighted by significant debt repayment, a net leverage below 2x, and a strong cash position, indicates potential for accelerated capital returns to shareholders and reinvestment in property enhancements, likely contributing to EPS growth.
  
• Efforts to improve mid-week occupancy at the STRAT, particularly through direct bookings and casino promotions, are expected to increase hotel revenue and improve operating margins.

Assumptions

• Analysts are assuming Golden Entertainment's revenue will decrease by -7.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.1% today to 0.4% in 3 years time.
• Analysts expect earnings to reach $2.8 million (and earnings per share of $1.35) by about October 2027, down from $274.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.3x on those 2027 earnings, up from 3.1x today. This future PE is greater than the current PE for the US Hospitality industry at 22.8x.
• Analysts expect the number of shares outstanding to decline by 58.41% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

• The decision to reduce large-scale entertainment acts in Laughlin and increase focus on smaller, cost-effective entertainment options may result in decreased patron volume, negatively impacting related gaming and F&B revenue.
  
• Declines in revenue and EBITDA in the Nevada Locals Casinos segment, especially due to decreased visitation and spending from lower-tier customers, could continue affecting the company's overall performance.
  
• Road construction negatively impacting entry to the Arizona Charlie's Decatur property and modest renovations to the hotel at Decatur that will complete in 2025 could further strain revenues and guest visitation in the short term.
  
• Increased labor costs, particularly highlighted by the new union contract, are likely to continue pressuring margins across Nevada Casino Resorts, despite measures to mitigate these increases.
  
• Reliance on successful cross-traffic between Atomic Golf and the STRAT may not materialize as expected, which could impact the anticipated visitor growth and revenue enhancement from this new entertainment offering.

Valuation

• The analysts have a consensus price target of $37.0 for Golden Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $31.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $656.8 million, earnings will come to $2.8 million, and it would be trading on a PE ratio of 34.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of $29.77, the analyst's price target of $37.0 is 19.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.