A regional uptick and market share gains should drive near-term earnings. Street too low on 2011 free cash flow too.
We’ve seen it before with the stocks of regional gaming operators. Free cash flow yields climb into the teens and above 20%. That high of a yield is unsustainable either because the free cash flow estimate is too high or the stock is too low. We believe ASCA will beat Q1 EPS and free cash flow estimates so you can guess which side of the equation we think is wrong.
Following a string of horrible weather for casinos, the 2nd half of February bounced back and we believe March trends are pretty strong. ASCA also appears to be gaining market share, mostly at the expense of Harrah’s. Harrah’s regional properties are looking tired, especially the slot product, from a lack of capex. Harrah’s has clearly opted to direct its skimpy capex budget to Las Vegas.
We think ASCA’s estimates need to go higher. Adjusted Q1 EPS should be well into the 30s versus consensus of $0.28. More importantly, we think the street is too low on Q1 and 2011 free cash flow. ASCA will pay little in cash taxes in 2011 due to bonus depreciation and other tax breaks. Our free cash flow estimate is $140 million or $4.25 per share on the post Nielsen Trust buyout of 33 million shares. That is a stunning 25% free cash yield.
We think that level of free cash flow should be sustainable. Any cash taxes in 2012 should be offset by EBITDA growth and less interest expense. ASCA will close a major refinancing that should reduce interest expense considerably.
While the cash flow is at least sustainable, this 25% yield is not, in our opinion. Catalysts are near term: 1) JP Morgan conference next week that should improve overall investor sentiment surrounding the regional gaming operators, 2) closing of the accretive refinancing in the next 1-2 weeks, 3) release of better March regional numbers in April, 4) Q1 earnings and free cash upside.
ASCA looks very good from a quantitative/technical trading perspective per the Hedgeye Macro team as can be seen in the chart below.