Monarch Casinos Will Grow With The Eventual Reversion Of Consumer Spending (NASDAQ:MCRI)

Monarch Casino & Resort Incorporated (NASDAQ:MCRI) is a Reno, Nevada-based casino owner and operator with two principal properties: the Reno-based Atlantis Casino Resort Spa, and the Monarch Casino Resort Spa in Black Hawk, Colorado.

Through these activities, Monarch has recorded Q3’23 revenues of $132.97mn- a 0.57% YoY decline- alongside a net income of $24.16mn- a 12.11% decline- and a free cash flow of $37.53mn- a 9.29% increase driven by increased operating cash flows.

Introduction

At its core, Monarch maintains a fourfold investment thesis, centred around its location-based advantage, with prime location in Reno and Denver being a major throughput to Las Vegas, its multivector growth opportunities across digital products, credit card products, and so on, a proven track-record for operations and development, and overall strong financial profile.

Due to this operational thesis, alongside a moderate undervaluation, I rate Monarch Casinos a ‘buy’.

Valuation & Financials

Trailing Year Performance

In the TTM period, Monarch’s stock- down 16.08%- has underperformed both TradingView’s Casino Index- down 3.51%- and the general market, as represented by the S&P 500 (SPY) – up 22.26% in the same period.

While the underperformance of the casino industry relative to the broader market is likely a symptom of the reduced purchasing power of consumers related to inflation and higher rates, Monarch’s underperformance to the casino industry is representative of the company’s greater sensitivity to the aforementioned factors.

Thus, I believe, as consumer purchasing power reverts, Monarch is positioned to experience greater share price growth than its peers.

Comparable Companies

The casino and gaming industry is largely differentiated by casino locales and general offerings. In recent times, with greater regulatory flexibility, a wider array of technologies, and a more diverse, inter-generational audience, casinos are able to cater to specialized groups. As such, rather than compare Monarch to any direct competitors, I chose to compare Monarch to similarly-sized gaming firms as defined by the ‘Peers’ tab on Seeking Alpha’s page for Monarch. This group includes the London, UK-based betting sports data provider, Genius Sports (GENI), the Enterprise, Nevada-based gaming firm, Golden Entertainment (GDEN), the holding company for Betway and Spin, the Super Group (SGHC), and iLottery market leaders, the Israeli, NeoGames (NGMS).

As demonstrated above, Monarch has seen the poorest TTM price performance of the group. Despite this, owing to the firm’s multiples-based value and growth capabilities, I believe Monarch is well-positioned, relative to peers, to grow.

For example, Monarch maintains the lowest trailing and second-lowest forward P/E ratio. Alongside this, the firm sustains the highest book value per share and joint-lowest debt/equity, demonstrating the company’s value across its income statement and balance sheet.

Furthermore, Monarch retains the second-best trailing 5Y revenue and earnings growth along with best-in-class ROE and ROA, reaffirming the company’s growth positioning.

Valuation

According to my discounted cash flow valuation, the net present value of Monarch, at its base case, is $73.41, meaning, at its current price of $66.79, the stock is undervalued by 9%.

My model, calculated over 5 years without perpetual growth built in, assumes a discount rate of 9%, balancing the firm’s debt-light cap structure with its higher equity risk premium. To remain conservative, I estimated a forward 5Y revenue growth rate of 8%, lower than the trailing 5Y arithmetic average of 23.42%.

Alpha Spread’s multiples-based relative valuation more than corroborates my thesis on undervaluation, estimating a base case undervaluation of 13% to a price of $77.10.

Therefore, using an average of my net present value and Alpha Spread’s relative valuation, the fair value of Monarch should be $75.26, representing a ~11% undervaluation.

Monarch’s TAM Growth Coincides with Multivector Organic Expansion Opportunities

A key aspect of Monarch’s bull case is tied to the wider, organic macroeconomic growth of its geographic growth, tying into organic net spend growth at its locations. For instance, over the past decade, Reno’s population grew 17%- more than double the national average- with Monarch also capturing economic development from Tesla’s Gigafactory, general per capita income growth, and an overall attractive business environment.

Monarch is additionally taking advantage of digital outlets for multichannel, cross-selling opportunities; the firm released its Atlantis Race & Sports app and BetMonarch apps successively, allowing the firm to drive foot traffic and digital traffic between one another, creating inherent brand loyalty and retention.

The firm’s Blackhawk location also retains the advantage of being located in a prime air traffic feeder market to Las Vegas, helping capture residual revenues from high-spending clients. Additionally, with favourable regulatory trends, greater high-margin market penetration, and ongoing population growth, Monarch is poised for superior growth.

Wall Street Consensus

Analysts generally echo my positive view on Monarch, estimating an average 1Y price target of $72.75, a 9.81% price increase.

Even at the lowest projected price target of $70.00, analysts expect a price incline of 5.66%.

I believe this reflects Wall Street’s opinion that Monarch’s growth potential remains underpriced by the broader market.

Risks & Challenges

Consumer Spending May Remain Constrained

A central theme of Monarch’s potential price reversion is the increase in consumer spending capabilities. This idea hinges upon the continued decline of inflation and declining interest rates by the end of the year. However, if rates or inflation remain sticky or are resurgent, consumer spending is prone to decline, compressing Monarch’s capabilities and long-run scale and margin growth.

The Industry is Prone to High Disruption

Although the casino industry is highly regional and relatively stable once a prime location is discovered, Monarch’s foray into digital technologies exposes it to novel risks and competitive intensity from a greater range of rivals. If Monarch does not successfully maintain its market position in digital gambling, the firm will not only lose out on significant invested capital but will also lose the synergistic growth it has the potential to create.

Conclusion

Monarch remains fundamentally undervalued and in pole position to benefit from increased consumer spending relative to rivals.