Although I generally prefer growth companies with strong competitive advantages, I consider myself to be value-conscious, if not a pure value investor. The fact is, value is always a relevant factor in any investment decision. So it's the gambler who regrets not buying Wynn Resorts (Nasdaq: WYNN ) at $50 simply because everything Steve Wynn touches is gold, while the investor says there's an insufficient margin of safety for a buy and doesn't give it a second thought.
What the value guy occasionally misses are well-thought-out opportunities -- instances where the case was laid out to make perfect sense, and the stock skyrockets while the value investor never pulls the trigger.
For me, that stock is Las Vegas-based casino operator Riviera Holdings (AMEX: RIV ) , which reported relatively strong fourth-quarter earnings yesterday morning. Following the report, Riviera's stock climbed 14.6% to $43.55 yesterday, and it's up by more than another 3% to $45 today. What stings a little bit is that a friend of mine forwarded me an email from a hedge-fund guy regarding the stock on July 28, 2004, when the stock was at $9.
Now, nobody's going to mistake Riviera for a premium hotel-and-casino operator like Wynn Resorts, Las Vegas Sands (NYSE: LVS ) , or MGM Mirage (NYSE: MGG ) . Riviera operates an outdated property on the red-hot Las Vegas Strip, as well as a property in the Black Hawk, Colo., market, where it must compete against Ameristar Casinos (Nasdaq: ASCA ) and Isle of Capri (Nasdaq: ISLE ) . The key is that Riviera's Strip property is just a skip away from the highly anticipated $2.7 billion Wynn Las Vegas, and it's directly across the street from Boyd Gaming's (NYSE: BYD ) Stardust, a property that should see redevelopment begin in the not-so-distant future.
At the time I got my email, Riviera was trading at about six times 2004 earnings before interest, taxes, depreciation, and amortization (EBITDA), which is low for the gaming industry in general, and particularly so for a company with 26 acres of land on the Las Vegas Strip. The company currently has $215 million in 11% bonds and a couple of million dollars in other notes, $19 million in cash, and a $30 million undrawn revolving line of credit. Interestingly, the company's 11% notes aren't due until 2011, and it's running at roughly break-even free cash flow despite the interest payments. What's more, the call date on those 11% notes is June 15, 2006, at which point the company will refinance and reduce interest payments, improving the bottom line.
Meanwhile, EBITDA is growing rapidly. Over the past four quarters, it's climbed 27% to a record $40 million.
Back in July, the stock had only a $32 million market cap. And basically, in the words of the hedge-fund guy, "Very rarely can you buy a company with such a tiny market cap relative to its (total enterprise value) that has no near-term bankruptcy risk (and) strong EBITDA growth, and is (free cash flow) positive."
Today, Riviera's enterprise value is around 10 times EBITDA, thanks no doubt to its land value, as well as the company's improving operational performance. The company is in decent shape, though its debt-to-EBITDA ratio is still over 5. But unlike a Wynn Resorts or Las Vegas Sands, Riviera probably isn't the quality of company you buy to hold forever. As a value investor, I would at least start to be cautious of the company's valuation, if not consider a sale.
Fool contributor Jeff Hwang owns shares of Ameristar Casinos.
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