For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What Monarch Casino & Resort does
Monarch is a hotel and casino operator of two properties: the Atlantis casino resort and spa in Reno, Nev., and the Riviera Black Hawk casino in Black Hawk, Colo. Monarch completed its purchase of the Black Hawk casino from Riviera for $76 million in April of last year.
In Monarch's second-quarter results, released two weeks prior, it recorded a 17% increase in net revenue to $49.7 million as it benefited from a full second quarter of revenue from the Black Hawk casino as opposed to last year's partial haul in the second quarter. Revenue at its established Atlantis casino and resort rose a more modest 8%. Adjusted EBITDA, however, soared 54.7% to $14.8 million, a new quarterly record, thanks to higher net revenue and lower administrative expenses.
Whom it competes against
There are two primary competitors for a casino and resort company like Monarch: domestic casino operators and the ailing health of the U.S. economy.
Operating out of "the biggest little city on Earth," Reno, Monarch is pretty well removed from the likes of MGM Grand (NYSE:MGM), Caesars Entertainment (NASDAQ:CZR), and Wynn Resorts (NASDAQ:WYNN) in Las Vegas. It does, however, compete head-to-head with Las Vegas Sands (NYSE:LVS) in Reno.
What all five casino and hotel operators have to contend with on a domestic basis, though, is sluggish discretionary spending from consumers. This year we've seen the payroll tax holiday end, and many middle-class consumers are preparing for the Jan. 1 start to the Patient Protection and Affordable Care Act, which, for those uninsured previously or on a bare-bones plan, is likely to create a significant bump in cash outflow for mandatory health insurance.
Because of sluggish U.S. growth, we've witnessed many casino operators, including Las Vegas Sands and Wynn, turning to China -- specifically Macau -- for faster growth opportunities. China's burgeoning middle class and untapped market for organized resorts presents a perfect opportunity for currently domestic casinos like Las Vegas Sands and Wynn to escape the slow growth of the U.S.
Other domestic competitors, such as MGM Grand and Caesars Entertainment, have more pressing issues to worry about. Caesars, for instance, is mired under close to $19.3 billion in net debt. Simply meeting its interest payments may soon become a challenge. MGM, on the other hand, has been trying to reignite U.S. sales with little success for going on six years. It, too, has recently turned to Macau to boost its bottom line, but even that hasn't been enough to move the needle for MGM back into the black.
After carefully reviewing the prospects for Monarch Casino & Resort, I've decided to make a CAPScall of underperform on the company.
I know what you're probably thinking: "But revenue just rose 17% and EBITDA hit an all-time high! Why would you bet against it now?" To some extent that argument is valid, with Caesars in no shape to be a threat with its debt-laden books, MGM still struggling in the U.S., and Wynn decisively focused on reinvigorating its Macau-based sales, which have slipped in recent months.
However, other constraints remain that have me concerned about Monarch's quarter-over-quarter comparisons next year once the Black Hawk casino is completely integrated. For one, as I mentioned above, consumer spending isn't expected to be robust. Higher taxes combined with the mandate for health insurance could be a recipe for lower customer traffic and profitability for casinos in general. Admittedly, Monarch makes a good chunk of change on an upper-income class of consumer whose visiting and gambling habits aren't going to change. But even that slight slowdown in the occasional middle-class visitor could adversely impact Monarch's results.
A lack of geographic diversification also works against Monarch. I'm not saying there's necessarily anything wrong with being a small-cap casino operator, but having only two resorts, and both in the U.S., leaves Monarch overly exposed to economic swings. I'd rather trade in Monarch for either Las Vegas Sands or Wynn, which have operations in both the U.S. and Macau.
Finally, it comes down to valuation and dividend income. Monarch does indeed have a lot less debt than many of its peers, but Las Vegas Sands and Wynn shareholders pulled down roughly 7% dividend yields last year, including special dividends. What have Monarch shareholders received in dividend payments over the past 10 years? Not one penny!
With Monarch already valued at 17 times forward earnings and its growth rate expected to slow to just 3% in fiscal 2014, I'd suggest taking your chips to a different casino.