A dominant player in the Las Vegas locals casino market, Station Casinos' portfolio consists of 9 major gaming and entertainment establishments as well as 10 smaller casinos. Although their roots date back to 1976, their recent messy past may have clouded investors' perception of the company. Now Station Casinos is looking to put the past behind them and go back onto the market. Some of their direct competitors include Affinity Gaming and Boyd Gaming (NYSE: BYD ). Station casino.
Their recent history is messy
Founded in 1976 with the opening of Bingo Palace (now Palace Station), Station Casinos has deep roots as a local casino. They were taken public in 1993 before being taken private again in 2007 in a highly leveraged buyout. Not even 2 years later Station Casinos was struggling with their $6.5 billion of debt, mostly due to the buyout, and had to file for Chapter 11 protection. Then after 2 years, in 2011 Station Casinos had finally exited bankruptcy having reduced their debt by $4 billion. And now, once again, Station Casinos is ready to go back on the market with their second IPO.
Source: Station Casinos' S-1
They're moving in the right direction
Sunset station hotel casino
Station Casinos hasn't just recovered from bankruptcy, they are growing revenue, improving operating margin, and showing positive net income. Owning or controlling six desirable gaming-entitled development sites, Station Casinos is positioned to keep up with increased demand and supporting future growth. Currently their growth is small but steady. As you can see below, Station Casinos' gross revenue is seeing the largest growth increase in their management fees, which comes from managing casinos outside of their ownership. However, their management fees make up some of the smallest part of their total sales.
Below is my DCF for Station Casinos using a discount rate of 10% and a terminal growth rate of 3%. The revenue growth rate is what I feel would be fair on the side of a mid-growth company.
Source: Author's calculations
As you can see, I am projecting the fair value of equity to be about $1.37 billion. This valuation would place their P/E at 16.1 for the trailing twelve months, about the resorts and casinos industry average of 10.9. Using the TTM, their P/S would be about 1 and P/B 2.1. I find these numbers to be fair for the company given the financials and risk associated.
The Station Casinos IPO can be an interesting one, but it has to be priced right. When it comes to investing in gambling, eyes are not on Las Vegas anymore, but rather East Asia. With Las Vegas Sands (NYSE: LVS ) and MGM (NYSE: MGM ) seeing their revenues in Macau doubling over the last few years, it's not surprising why there is so much interest there. Las Vegas has seen a much slower growth rate and I am projecting that will likely be the case for the future. This is due in part to states legalizing casinos for the increased revenue. And to increase domestic growth, the big players are taking advantage of building those casinos where they can. Wynn (NASDAQ: WYNN ) is building a $1.7 billion casino hotel and resort outside of Boston which is expected to be completed by 2018, which is expected to produce more than $800 million in revenue. With all of the heavy hitters in the industry focusing on new areas domestically and internationally, will the market overlook the simple local casino, Station Casinos? Some investors might find Station Casinos to be outdated and unable to compete on the large scale, and if that's the case then maybe it will trade at a deep discount.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.