Expansion Into Louisiana And Fairmount Park Will Diversify Future Operations

Key Takeaways

• Strategic closures and new technology in Illinois are expected to boost financial performance and revenue growth.
  
• Expansion and acquisitions into new markets aim for revenue diversification and improved margins through operational synergies.
  
• Strategic closures and integration challenges in new markets pose risks to profitability, revenue stability, and execution, with increased regulatory uncertainty adding pressure.

Catalysts

Operates as a distributed gaming and local entertainment operator in the United States.

• Strategic closures of underperforming locations in Illinois are expected to lead to improved financial performance, positively impacting EBITDA and returns on capital.
  
• Introduction of ticket in-ticket out (TITO) technology in Illinois is anticipated to enhance cash processing efficiency and improve customer experience, which could potentially drive revenue growth.
  
• Expansion into new markets such as Louisiana and the acquisition of Fairmount Park signal opportunities for revenue growth and diversification beyond the core Illinois market, contributing positively to overall earnings.
  
• Development of the Fairmount Casino in phases, with the first phase expected to open in Q2 2025, presents an opportunity for incremental revenue from gaming and non-gaming amenities, ultimately increasing EBITDA.
  
• The company's active M&A pipeline and potential to capitalize on the fragmented $15 billion local gaming market should support sustained revenue growth and improved margins due to operational synergies.
  

Accel Entertainment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Accel Entertainment's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 5.5% in 3 years time.
• Analysts expect earnings to reach $77.3 million (and earnings per share of $0.9) by about March 2028, up from $35.3 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 23.7x on those 2028 earnings, down from 24.1x 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 grow by 2.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.56%, as per the Simply Wall St company report.

Accel Entertainment Future Earnings Per Share Growth

Risks

• The strategic closures of underperforming locations in Illinois and the ongoing assessment for further closures indicate potential issues in optimizing operations and profitability. This may impact revenue and net margins if the closures do not yield the expected improvements.
  
• The integration challenges in new markets like Louisiana and the development of Fairmount Park pose execution risks, potentially leading to unforeseen costs or delays that could affect earnings and free cash flows.
  
• The anticipated increase in CapEx for 2025, focusing on existing markets, Louisiana, and Fairmount, could pressure free cash flow and returns in the short term if expected growth or efficiencies are not realized.
  
• Dependence on favorable weather conditions for consistent performance in various markets underscores vulnerability to seasonal impacts, which could affect revenue stability.
  
• The regulatory uncertainty, especially concerning potential iGaming legislation and its impact on route gaming, poses a risk to the company’s current gaming model, potentially challenging revenue and earnings projections.

Valuation

• The analysts have a consensus price target of $15.333 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 2028, revenues will be $1.4 billion, earnings will come to $77.3 million, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 9.6%.
• Given the current share price of $9.91, the analyst price target of $15.33 is 35.4% 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.