Must-know: Why value casino operators are at a forward multiple
A look into immediate future performance
Enterprise value (or EV) divided by earnings before interest, tax, depreciation, and amortization (or EBITDA) is a significant financial metric used in valuing comparable companies. This multiple’s capital structure is neutral, meaning it takes both the debt and shareholders perspective, unlike price divided by earnings (or PE) which takes only the shareholders perspective.
Generally, the lower the ratio, the more undervalued the company is believed to be. Since the casino operators are experiencing both organic and inorganic growth, EV divided by the trailing twelve months (or TTM) EBITDA would be less meaningful due to the failure to take into account the consolidated or expanded future performance of the casino operators.
So EV divided by the next twelve month (or NTM) EBITDA is a suitable measure for valuing the companies since it takes into account the immediate future performance of the company, incorporating the organic and inorganic growth factors into EBITDA.
Interested in BJK? Don't miss the next report.
Receive e-mail alerts for new research on BJK
The above chart shows that both Genting Malaysia and SJM Holdings are undervalued relative to its peers since both of these companies have significant net cash positions, which reduce the firms’ EV.
Companies like Caesars Entertainment (CZR), Boyd Gaming (BYD), MGM Resorts (MGM), and Penn National Gaming (PENN) have seen a rise in their share prices. A good way to get exposure to these companies is to invest in exchange-traded funds (or ETFs) like VanEck Vectors Gaming (BJK).
Buyers are more interested in ensuring their purchase price is reasonable against the next twelve months’ performance. It’s the future performance that would ultimately support the price paid by the buyer. In stable or mature industries, the last twelve months’ performance can serve as a good proxy for the next twelve months.
However, for companies in growth industries, like technology, or rapidly growing markets, the last twelve months would be less relevant. So buyers would focus on the reasonability of the NTM EV-to-EBITDA ratio and ensure that the multiple paid is within its tolerance level and industry benchmarks.
To know more about the casino gaming market performance, click here.