Following a virtual meeting with Monarch Casinos & Resorts CEO John Farahi, Truist Securities analyst Barry Jonas called the company “one of the best-performing stocks in our coverage.” He reiterated a Buy rating on Monarch, which was trading at $96.17 per share at the time of his December 8 report.
Farahi told Jonas that Monarch had seen no attenuation of its high-end business, the company’s primary focus. Jonas added, “Management did note that it’s seeing softness at the low-end U.S. consumer, which has been impacted by inflation.”
Monarch’s two markets, Reno and Black Hawk, Colorado, were characterized by stability and financial health. This was attributed to population growth and economic solidity.
Executives of Monarch “highlighted that its markets aren’t dependent on tourism (which has impacted other gaming markets),” largely because half of its business is locally derived. The company expects business to grow organically, largely by capturing market share from nearby rival casinos. Another priority was to decide how to best use 20 acres of raw land near the Atlantis resort in Reno.
Farahi called the current merger-and-acquisition climate “the most opportunistic time in the past five years.” While M&A action was deemed a priority, management said it was still evaluating opportunities.
Monarch’s merger goal would be to achieve a return on investment in the high teens. To do this, it would see assets that yielded cash flow of $150 million a year. Farahi said he was willing to take Monarch’s leverage up to four times cash flow in order to do this. But only purchases that include real estate would be considered—no operating companies. Reno and Las Vegas were ruled out, “given the intense competition and potential for cannibalization at the Atlantis.”
Also blackballed were the seven states in which igaming is legal, due to Farahi’s strongly negative view of digital gambling. Illinois was also deemed a low priority, citing an “unstable regulatory environment.
“That said, management reiterated that it’s always possible to find unique opportunities even in markets with unattractive characteristics,” according to Jonas. He noted that Monarch was even willing to look at non-gambling hospitality assets.
“Given its pristine balance sheet and solid commercial banking relationships, management will not issue equity for a potential acquisition,” Jonas wrote. He observed that Farahi was not in an expand-or-else mode and “will remain disciplined in its pursuit of M&A.”
Should a prime opportunity not manifest, Jonas said, Farahi would opt for a special dividend to shareholders. Stock repurchases were also not ruled out, although they would be targeted ones.
In other Monarch news, the company continues to appeal a court judgment against it. In February, PCL Construction Services was awarded $74 million, a decision that Monarch is contesting.