TPS Trade Alert – June 30, 2015

Recommendation:

Buy Nevada Gold & Casinos Inc. (NYSE: UWN) up to $1.80 per share.

 

Trade Rationale:

Gaming stocks haven’t exactly been paying off huge jackpots the past few years.

Expenses are a big part of the problem.  You don’t build and maintain a sprawling complex like Caesars Palace in Vegas without massive overhead.

Caesars is huge… a 25,000 square foot restaurant, a 40,000 square foot night club, a 300,000 square foot convention center, the bills add up and this is one of the reasons why Caesars is in financial trouble.

Earlier this year, a Caesars Entertainment Operating Co. unit filed for Chapter 11 bankruptcy.

When casinos report their expenses to State Of Nevada Gaming Control Board, expenses fall into one of two buckets: one for General and Administrative expenses and the other for Departmental expenses.

Departmental expenses, which usually run just below 60%, include everything from payroll and bad debt to comping rooms, drinks and entertainment for guests who like to gamble.

Comping is the #1 Departmental expense.  The #1 General and Administrative expense is interest payments.

Gaming Is Clearly A Profitable Business 

The challenge is to make sure overhead doesn’t eat up revenue.  And that’s why we like the business model of Nevada Gold & Casinos Inc.  (NYSE: UWN).

The Crazy Moose Casino in Pasco, Washington, Coyote Bob’s Roadhouse Casino in Kennewick, Washington… these aren’t sprawling destination resorts.  They’re where locals go for poker and pizza.

Not much need to comp, and no massive interest expense to build sprawling casinos, nightclubs, and convention centers.

Overhead is low.  It’s even lower on the slot route the company runs in Deadwood, South Dakota… it’s where Nevada Gold runs the vending machine business model with 800 slot machines.

The only connection Nevada Gold & Casinos has to the state of Nevada is a newly acquired neighborhood casino in the Vegas suburb of Henderson, and its Las Vegas corporate headquarters.

 

Company Profile:

The company has been around since 1977.  We like the management team.  Bill Sherlock is a director and he owns 80,000 shares of stock.  Sherlock has pulled tours of duty with Hilton, New York New York in Las Vegas, and Foxwoods in Connecticut.  He knows the business.

Michael Shaunnessy has been CEO since 2012.  Both Shaunnessy and Sherlock have been buying the stock over the past year.

Net income has been growing.  In 2014, it was $448,000, in 2013, $129,000 and in 2012, the company lost more than $6 million.

Operating expenses are trending down.  So is interest expense… using free cash flow, long term debt has been reduced by almost a third over the past three years.

Now is a good time to buy Nevada Gold & Casinos. As recently as mid-May, the stock was trading at $2.19.  It’s given up some ground and has been trading in a channel between $1.53 and $1.84.

We see strong growth for the stock.  A move into $5-6 range is not unreasonable to expect as Nevada Gold continues to pay down debt, strengthen its balance sheet, reduce expenses, and strengthen its financial footing.

We’ve already seen it has the ability to get the money it needs for smart acquisitions, like the casino in Henderson. What comes next should be even more exciting.

 

Key Facts:

Company:                                  Nevada Gold & Casinos Inc.

Ticker:                                       (NYSE: UWN)

Recent Price:                              $1.66

Buy up to Price:                          $1.80

Market Cap:                               $27.0 million

Avg. Daily Volume (3 month):       87,939 shares

 

Chart:

 

Category: TPS Trade Alert