Enterprise Value (or EV) divided by earnings before interest, tax, depreciation, and amortization (or EBITDA) is used in valuing companies in a capital-intensive industry like casinos. The capital structure of this multiple is neutral, which means it takes both the debt and shareholders’ perspective, unlike price divided by earnings (or PE) that takes only the shareholders’ perspective.
The above chart shows the evolution of one year forward EV/EBITDA multiple of Pinnacle Entertainment (PNK), Penn National Gaming (PENN), Boyd Gaming (BYD), and Isle of Capri Casinos (ISLE). As of November 28, 2014, Pinnacle Entertainment’s one year forward EV/EBITDA stood at 9.2x compared to its peer group average of 7.6x. The huge drop in the multiple from 14.3x to 9.0x in December 2013 is attributable to the revenue and cost synergies being created when Pinnacle Entertainment acquired Ameristar Casinos in August 2013. This acquisition was expected to immediately be accretive to Pinnacle Entertainment’s earnings and free cash flow.
Pinnacle Entertainment’s consensus EBITDA estimates given by Wall Street analysts are expected to increase by ~1.9% in 2015 and ~1.1% in 2016 from 2014 and 2015, respectively. Considering this EBITDA growth, Pinnacle Entertainment is valued at 8.5x based on 2015E EBITDA and 8.0x based on 2016E EBITDA. However, Pinnacle Entertainment’s consensus revenue estimates are expected to decrease by ~0.5% in 2015 and increase by ~0.8% in 2016 from 2014 and 2015 levels, respectively.
Investors who would like to avoid the risk of investing in a single casino company may invest in exchange-traded funds (or ETFs) such as Consumer Discretionary Select Sector Standard & Poors depositary receipt (or SPDR) fund (XLY) and VanEck Vectors Gaming (BJK).
To learn more about the casino industry, indicators, and fundamentals, visit the casino sector page.