Critical Acquisitions And Market Expansion Fuel Future Revenue And EBITDA Growth

Key Takeaways

• Strategic expansion and diversification efforts, such as the acquisition of Fairmount Park, aim to enhance revenue and EBITDA growth.
  
• Introduction of TITO technology and focus on organic growth in key states are expected to increase efficiency, convenience, and market share.
  
• Aggressive expansion and reliance on market growth amidst regulatory challenges and competition could strain Accel Entertainment's margins and operational capabilities.

Catalysts

Operates as a distributed gaming operator in the United States.

• The pending acquisition of Fairmount Park and its associated master sports betting license, racetrack, off-track betting opportunities, and planned development into a locally focused casino indicates a strategic expansion into new revenue streams and diversification beyond traditional gaming units, likely enhancing revenue and EBITDA growth.
  
• Expansion in unit growth through the addition of almost 50 locations, highlighted by growth in Illinois and Montana, demonstrates Accel's capacity to increase its market share and revenue through geographic and operational expansion, impacting revenue growth positively.
  
• Introduction of ticket in, ticket out (TITO) technology in Illinois is expected to make cash processing more efficient and enhance player convenience, potentially leading to an increase in machine play volume and revenue.
  
• Accel's strategic focus on growing organically in key states like Illinois, Nebraska, and Georgia through both newly licensed establishments and converting competitor locations, as well as improving share of location economics, points towards sustainable long-term revenue and EBITDA growth.
  
• The mention of maintaining a strong balance sheet with significant liquidity and a proactive capital return strategy, including a share repurchase program, underscores strong financial health and operational efficiency that could lead to enhanced earnings per share (EPS) and attract investor interest, contributing to a potential revaluation of the stock.

Assumptions

• Analysts are assuming Accel Entertainment's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.1% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $52.8 million (and earnings per share of $0.61) by about September 2027, up from $48.4 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 26.2x on those 2027 earnings, up from 19.7x today. This future PE is greater than the current PE for the US Hospitality industry at 23.5x.
• Analysts expect the number of shares outstanding to decline by 3.48% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Risks

• Increased state gaming tax in Illinois from 34% to 35% could squeeze margins, especially if Accel's efforts to offset this rise through variable cost adjustments don't fully compensate, affecting net margins.
  
• Expansion into new markets, including the Fairmount Park acquisition, represents execution risk, especially with regulatory approvals pending and the ambitious development plans, which could impact earnings if these projects face delays or higher than expected costs.
  
• The aggressive growth strategy, including M&A activities described, could strain Accel's operational capabilities or lead to integration challenges that might affect earnings if Accel fails to manage the growth effectively.
  
• Accel's reliance on continued market expansion in Illinois, Nebraska, and Georgia for growth may be risky if regulatory changes occur or market saturation is reached sooner than expected, potentially stagnating revenue growth.
  
• Introduction and expansion efforts in markets with increased competition, such as Nevada, where Accel noted modest same-store sales declines due to increased supply, could put pressure on revenues if Accel fails to maintain or grow its market share amidst intensifying competition.

Valuation

• The analysts have a consensus price target of $14.67 for Accel Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.3 billion, earnings will come to $52.8 million, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 8.5%.
• Given the current share price of $11.57, the analyst's price target of $14.67 is 21.1% higher.
• 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.