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AGS Stock Cheap with Double Potential

Shares of slot machine manufacturer AGS (NYSE:AGS) are trading higher today. That’s after the company reported second-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) that beat Wall Street estimates.

AGS stock
AGS slot machines seen in the illustration above. An analyst believes the stock can more than double. (Image: AGS Inc.)

While the stock is up 28.27% off its July lows, some analysts are betting on more upside ahead as casino operators upgrade slot offerings. In a note to clients today, B. Riley analyst David Bain reiterates a “buy” rating on AGS while boosting his price target on the stock to $14 from $12, implying the shares can more than double from current levels. He points out the stock is deeply discounted relative to competitors.

AGS trades for 5.3x/4.8x CY22E/CY23E EV/EBITDA, a 41%/40% discount to the casino supplier group average, and it carries an 18% net free cash flow yield versus peers at ~11%. We continue to believe AGS shares should rerate higher,” wrote the analyst.

The April through June period represents the ninth straight quarter in which AGS beat analysts’ earnings estimates.

AGS Stock may not Be Cheap for Long

Valuation alone isn’t a reason to buy or sell a stock. But in the case of AGS, the company has catalysts that could indicate the shares won’t be inexpensive for an extended period.

For example, casino visitation trends are strong across the US, compelling operators to extend the slot upgrade cycle, owing to the high margins offered by gaming machines. Specific to AGS, the company is adding market share and derives 70% of its sales from recurring revenue streams.

“Further, AGS table business is scarce, vastly recurring with over 60% margins – current and former valuation multiples of specialty table public companies range between 11x and 13x (value clearly not incorporated into AGS shares),” notes Bain. “AGS has been quietly and consistently outperforming expectations.”

The analyst adds that as the company’s 2022 and 2023 net leverage retreats to 3.8x and 3.4x, respectively, the stock discount compared to peers should evaporate.

Texas-Sized Catalyst

In June, the US Supreme Court ruled that Texas cannot block the Ysleta del Sur Pueblo from offering bingo games on its reservation near El Paso. That ruling could positively affect the Alabama-Coushatta — another Texas tribe — and AGS.

It remains to be seen if those Texas tribes pursue traditional casino licenses. But that’s a possibility, and if that form of gaming is opened in the second-largest state, AGS stands to benefit.

“AGS cited a June 15 Supreme Court decision which clarified the right for both the Alabama-Coushatta and Ysleta del Sur Pueblo tribes to continue to operate Class II gaming at existing facilities. We believe this secures over $10M in existing per annum recurring EBITDA from participation games for AGS,” concludes Bain. “Further, AGS cited expansion opportunities with both tribes, matching our earlier checks.”

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