Please ensure Javascript is enabled for purposes of website accessibility

Oh, Riviera!

By Jeff Hwang – Updated Nov 16, 2016 at 2:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Even value investors rue the opportunities they missed.

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 Riviera operates an outdated property on the red-hot Las Vegas Strip, as well as a property in the Black Hawk, Colo., market, where it must compete against Ameristar Casinos (NASDAQ:ASCA)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. The Fool has a disclosure policy.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$59.65 (-0.90%) $0.54
Boyd Gaming Corporation Stock Quote
Boyd Gaming Corporation
BYD
$47.02 (-2.91%) $-1.41
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$35.47 (0.51%) $0.18
Ameristar Casinos Inc. Stock Quote
Ameristar Casinos Inc.
ASCA.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.