Landcadia Holdings II Has Got to Be Running Out of Steam

Tilman Fertitta’s special purpose acquisition company has been on a roll since the end of October. Landcadia Holdings II (NASDAQ:LCA) finished the month of October at $12.40. In the six weeks since, LCA stock is sitting at $24.77, three pennies off a double. 

Image of a laptop surrounded by gambling paraphernalia.
Source: Stokkete/ShutterStock.com

The sensible thing would be to take profits. 

Of course, if you believe in Fertitta’s online gaming ambitions, and perhaps even the man himself, you probably feel its share price is only getting started. 

While there’s an argument to be made that Fertitta’s on the right side of history when it comes to online gaming, I still believe that LCA Stock has got to be running out of steam.

Here’s why. 

Landcadia Votes

Landcadia announced on Dec. 3 that it would hold a special meeting of shareholders to vote on the merger with Golden Nugget Online Gaming. If successful, it will trade under the symbol GNOG on Nasdaq. 

The vote announcement took six months to come to fruition because Golden Nugget first had to secure an online gaming license from the New Jersey Casino Control Commission. It got that on Nov. 25.    

So, barring something unforeseen, Tilman Fertitta will be able to take one of his most prized assets public; more of his assets are expected to follow as he works to sort out his debt issues while retaining control of his empire.  Early in the pandemic, Fertitta borrowed $250 million at an estimated 15% to keep his empire from cratering. 

The merger will give Fertitta 11.1% economic interest in the new Golden Nugget Online Gaming, but more importantly, 79.9% of the voting rights. He’s expected to repeat the process with Golden Nugget and Landry’s Restaurants. 

Whatever happens with these assets, a merger approval allows him to grow the business without it further straining his personal finances. 

How Much Growth?

If you read the comments section of the article at Casino.org reminding LCA stock investors about the upcoming vote, you would think another double for LCA stock was in the cards. 

“WHOO HOO.. The stock has been a gold mine for me. Bought another 75 shares on the dip this morning. I believe this stock will be at $60 a share in the next few months,” commented someone named Robert on Dec. 3.

Ok. Let’s run with that assumption.

According to its regulatory documents filed with the Securities and Exchange Commission, the new Golden Nugget Online Gaming will have 70,813,000 shares outstanding. Based on a $60 share price, GNOG would have a market capitalization of $4.25 billion and an enterprise value of $4.86 billion based on $80.0 million in cash and $141.0 million in long-term debt. 

In the nine months ended September 30, GNOG had $68.1 million in revenue, operating income of $22.5 million, and pre-tax income of $3.4 million. That’s up from $39.9 million of sales in the same period a year earlier. While its operating income was 74% higher in 2020, its pre-tax income fell 74% over a year earlier due to $19.1 million in interest expense.

Sales grew 71% year-over-year from Q1-Q3 2019 to Q1-Q3 2020. Annualize this, and Golden Nugget’s sales for fiscal 2020 will be $116 million.

Based on an enterprise value of $4.86 billion, it would be valued at 42 times sales. Assuming it increases revenues by 70% in 2021, that multiple drops to 25. On a market cap basis, that’s 37 and 22 times sales in 2020 and 2021, respectively. 

By comparison, DraftKings (NASDAQ:DKNG) is currently trading at 18 times its trailing 12-month sales

What Does It Need to Do to Get to $60

Golden Nugget’s attractive to investors because it makes money. In the latest nine-month period, it had a 33% operating margin. By comparison, DraftKings had an operating loss of $610 million in the latest 12 months and an operating margin of -145%. 

With New Jersey in hand, it ought to keep the sales growing at or near 100%. If it doubles sales in 2021, then I could see a $60 stock price, but given the competition is growing every day, that’s going to be a large ask by investors. 

I’m not a fan of Fertitta’s and I said so in my last article in November.  However, he understands this is a valuable asset, which is why it’s first out the door. 

I wouldn’t have any part of this stock, but that doesn’t mean you shouldn’t. 

I’m not sure we’ll see $60 in the next few months, but given how hot online gaming is at the moment, I wouldn’t argue with $42, give or take a dollar or two. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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