Asset Sales Will Optimize Capital Structure, But Occupancy And Labor Costs Pose Challenges

Key Takeaways

• Asset divestitures have optimized capital structure and reduced leverage, enhancing future earnings and margins.
  
• Commitment to shareholder returns through dividends and buybacks could increase future EPS.
  
• Declining occupancy and increasing costs in Nevada segments, combined with pressures from acquisitions and labor inflation, could adversely affect revenue and margins.

Catalysts

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

• The sale of the Nevada Distributed business and noncore asset divestitures generated over $600 million, enabling Golden Entertainment to optimize its capital structure, reduce leverage, and lower its cost of capital, which should improve future earnings and net margins.
  
• The introduction of a regular quarterly dividend and significant share repurchases (14% of the free float) suggest a commitment to shareholder returns, potentially increasing future earnings per share (EPS).
  
• Improvements in rated gaming revenue, particularly at The STRAT, and plans for more strategic programming at properties like Laughlin could enhance revenue and EBITDA, driven by increased visitation and spending in 2025.
  
• The ongoing turnaround and stabilization of new taverns, expected to reach stable performance by year-end, combined with sequential revenue improvements at current locations, will likely support revenue and margin growth.
  
• Favorable long-term economic trends in Nevada, including population and employment growth, coupled with Las Vegas' ongoing recovery in visitation and future development projects, are anticipated to drive revenue and EBITDA expansion in the coming years.

Golden Entertainment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Golden Entertainment's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.6% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $41.9 million (and earnings per share of $1.5) by about March 2028, down from $50.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, up from 14.2x today. This future PE is greater than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.5%, as per the Simply Wall St company report.

Golden Entertainment Future Earnings Per Share Growth

Risks

• The midweek occupancy at The STRAT was down 6%, contributing to declines in the Nevada Casino Resorts segment, impacting overall revenue and net margins.
  
• Las Vegas citywide occupancy and ADR were weaker in October and November, particularly for mid to lower-tier properties due to events like the election and a softer second year of F1, which could negatively affect revenue.
  
• Nevada tavern performance was negatively impacted by recent acquisitions needing revamping of operations, possibly leading to increased operating expenses and affecting net margins.
  
• Labor costs are anticipated to continue to grow, with expectations of mid-single-digit labor inflation in the portfolio, which could impact overall earnings.
  
• Promotional activity, particularly in the Las Vegas locals market, although rational, could still pressure net margins if not calibrated against the lower-end database trends.

Valuation

• The analysts have a consensus price target of $36.857 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 2028, revenues will be $711.5 million, earnings will come to $41.9 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 9.5%.
• Given the current share price of $27.18, the analyst price target of $36.86 is 26.3% 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.