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Is Monarch Casino a Small-Cap Gaming Winner?

Michael Lewis
October 24, 2013

Monarch Casino and Resort (NASDAQ: MCRI) is a lesser-known and small player in the gaming world, but investors interested in the space likely know its key properties. The company, which owns the Atlantis Resort and Casino in Reno, Nev. (not to be confused with the one in the Bahamas), reported earnings on Tuesday. Figures on both the top and bottom lines showed improvement over the year-ago quarter, and showed a fifth quarter of consecutive growth. The company only owns two properties, but generates cash and, like its bigger casino brethren, is seeing growth in the core gambling business. Should you take a turn on Monarch Casino and Resort?

Earnings recap
For the fiscal third quarter, Monarch saw its top-line sales grow modestly -- up 6.4% from the year-ago quarter. The company's Atlantis resort posted the majority of organic growth, with healthy gains in gambling and food revenues. Another Monarch property -- the Monarch Black Hawk -- achieved its gains via lower promotional allowances and better food revenues. Investors need to keep in mind, though, that the terrible Colorado floods kept the resort closed for four full days during the quarter.

The company's adjusted EBITDA climbed just under half a million dollars, to $12.78 million -- a 3.6% gain.

The Monarch Black Hawk is solely a gaming facility. However, the city council has paved the way for the company to develop it into a full-scale resort, complete with more than 500 hotel rooms, a spa, and four restaurants. For comparison, Atlantis currently has around 875 hotel rooms, eight restaurants, and plenty of entertainment and shopping spaces.

Many domestic regional casinos have had trouble in recent periods, with the exception of Monarch and one other. Does this mean that Monarch is doing something right?

Talking comps
As a regional gaming play, Monarch competes with peers such as Pinnacle Gaming (NYSE: PNK), a business with a $1.4 billion market cap that recently doubled its number of properties (now 16) after a merger with Ameristar. Over the last year-and-a-half, small players in the space have seen revenues decline as their markets' consumers just don't seem to have the confidence to approach the tables. Pinnacle, though, has a large footprint that may allow it to grow in coming periods.

Pinnacle looks far cheaper than Monarch on an earnings basis -- 7.6 times forward earnings versus Monarch's seemingly rich 18.6 times. However, when taking debt into consideration (Pinnacle has billions of it from the merger), Monarch trades at an EV/EBITDA of just 8.8 times, whereas Pinnacle trades at more than 12 times.

As of the end of September, Monarch had approximately $17.5 million in cash, and $56.3 million in long-term debt. As the company builds out the Black Hawk facility, investors should keep a close eye on earnings growth. M