Monarch Casino Stock Soars After Analyst Says Baby Is Being Thrown Out With Bathwater

Posted on: March 13, 2020, 02:29h. 

Last updated on: March 13, 2020, 03:05h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Monarch Casino & Resort (NASDAQ:MCRI) joined other gaming equities in rebounding Friday, soaring 12.58% after an analyst said the stock’s recent slide is the epitome of “throwing the baby out with the bathwater.” That’s an old Wall Street saying referring to quality stocks that get hit during broader market slides.

Atlantis operator Monarch Casino rallied Friday after an analyst said selling in the name may be overdone. (Image: YouTube)

On Friday, shares of the operator of the Atlantis Casino-Resort in Reno, Nevada surged on more than triple the average daily volume, taking a bite out of what had been a March decline of more than 61 percent, after Stifel analyst Brad Boyer dubbed that selloff “irrational.”

While MCRI is in no way immune to challenges introduced by the (coronavirus) outbreak, we would argue the company is positioned to benefit from several structural advantages that are currently being overlooked by investors,” said Boyer in a note obtained by Casino.org.

Among the Monarch catalysts highlighted by the analyst are one of the best balance sheets in its peer group, low leverage, and easy access to capital via strong cash flow and a $50 million credit facility. Those are important traits at a time when many market observers are fearing companies could face liquidity crunches if a recession arrives.

Waiting For Cooler Heads to Prevail

Entering Friday, gaming stocks were under intense selling pressure this month as investors bailed on the group amid fears the COVID-19 pandemic is going to sap earnings and keep gamblers away. Some analysts are noting the pandemonium in casino equities is depressing valuations to the point that some names, including Monarch, may be too tempting to ignore when the chaos ebbs.

“All told, while the irrational selloff to the sub-5x 21E earnings before interest, taxes, depreciation and amortization (EBITDA) level has caught our attention, we would prefer to see some level of rationality return to the public equity markets prior to growing more constructive on the shares,” said Boyer.

Monarch reported fiscal first-quarter results earlier this week. While the company said there wasn’t a material impact from the coronavirus on those numbers, management noted that, more recently, some older visitors are opting to stay away from the Atlantis and the Black Hawk casino in Colorado because of fears of contracting the respiratory illness.

Colorado And M&A Opportunities

Monarch’s Black Hawk, Colo. property is under expansion, something viewed as an important earnings and revenue driver for the company. On a recent conference call, management did not indicate the COVID-19 outbreak is delaying enhancements at that venue.

On the acquisition front, Boyer notes some footnotes in Monarch’s earnings release indicate the operator was close to buying a rival in recent months, but ultimately elected to pass on that purchase. However, the combination of the company’s strong balance sheet and depressed stock prices in the industry could compel it to consider acquisitions down the road.

“Although the recent global economic turmoil may compel management to take a pause in its pursuit of additional M&A targets, we continue to believe MCRI’s capital structure flexibility and the generally onerous levels of debt incurred by several of its regional operator peers, favorably positions the company to potentially execute thoughtful and accretive M&A transactions at a future date,” said the analyst.

Boyer has a “hold” rating and $35 price target on Monarch, implying upside of almost 46 percent from Friday’s close.