I love microcap stocks because they have the most potential for that elusive ten-bagger we all seek. Monarch Casino & Resort (NASDAQ:MCRI) has thus come onto my radar, and it’s worth a look for those interested in a low-cost speculative play.
Monarch owns and operates the Atlantis Casino Resort Spa, located in Reno, Nev., as well as the Riviera Black Hawk Casino in Colorado.
Atlantis is no small property. It has a massive 61,000 square feet of casino space, which would put it around the 25th-largest were it in Las Vegas. It also has all the expected trimmings, including a well-regarded 30,000-square-foot spa. But for us moneygrubbing investors, we love the 1,450 slot and video poker machines and 38 table games.
The Riviera Black Hawk Casino is about half the size, and is being renovated and expanded. Also, those of you familiar with the Riviera in Las Vegas also might know that Monarch purchased this property with intent to renovate it.
The trick with any casino — particularly those in Reno and Vegas — is competition. There are so many different tiers of property in these cities, appealing to a wide range of clientele. It’s thus a necessity that your resort be the top name in your category. Atlantis is arguably in that category, but there will always be detractors. The Riviera in Vegas will have a lot to live up to, given the insane showmanship and design of all the other resorts. At least in Colorado, competition is limited.
Monarch will report at the end of April. As for the quarter ending Dec. 31, Atlantis saw a 2.5% revenue decline while the Black Hawk saw a 14% increase. Adjusted EBITDA — which is a good idea to look at to determine how the company’s cash flow is behaving — was mixed; Atlantis’ was down 9% to $5.8 million while Black Hawk’s was up 36% to $3 million.
The company drew down its credit facility, using $56 million of it to fund the Black Hawk acquisition, placing its overall balance at $81 million. Meanwhile, MCRI holds $19 million in cash. The Farahi family owns almost a third of the shares, which is very heartening. I like family businesses, and I like when they have a lot of exposure, as they do. Other indications of further faith in this investment: A Monarch officer made insider purchases of about 6,500 shares last August, and private equity holds 13% of the company.
MCRI looks to significantly increase earnings this year, from 55 cents to 80 cents, before slowing to 91 cents in 2014. However, these estimates are only provided by two analysts. To me, this is going to be all about execution, and getting people to adopt these properties as their resorts of choice for their particular demographic.
When it comes to the biggest gaming names, I think of Wynn Resorts (NASDAQ:WYNN) as the premier name in casinos, yet would advise holding it only as a trading stock. Las Vegas Sands (NYSE:LVS) might make for a nice mix of speculation and long-term hold, while MGM Resorts (NYSE:MGM) is pure speculation loaded with way too much debt to ever amount to much.
But investors who want to buy in to a cheap name and literally roll the dice should consider Monarch. It’s speculative, but over the next five years has more potential upside than an established Vegas play.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.