Street too low, FCF yield too high
ASCA reported a blockbuster quarter this week, beating our EPS estimate by 9 cents and consensus by 12 cents. Margins were particularly strong and management’s outlook was favorable. But we don’t want to rehash the quarter. To quote Larry Kudlow “the mother’s milk of stocks is earnings” and we think strong earnings going forward and an attractive free cash flow yield will propel ASCA still higher.
We turned positive on ASCA with our 3/24/11 post “ASCA: FCF AND EARNINGS” (3/24/2011) where we stressed its attractive free cash flow yield and potential for higher than expected earnings. While the stock has risen over 30% since then, the good news is that we’re essentially in the same situation. Thanks to an incredibly accretive (earnings and free cash flow) refinancing and stock buyback, ASCA’s free cash flow yield remains over 20% and earnings estimates still need to go higher. As we’ve pointed out, for ASCA that combination has historically resulted in significant share appreciation.
Street estimates on Q2 and FY 2011 and 2012 are still too low. We’re 10% and 23% above consensus Q2 EBITDA and EPS, respectively. For fiscal year 2011, we’re 8% and 31% higher than consensus. The Street seems to be underestimating the accretion from the refinancing and buyback and more importantly, continued margin improvement and revenue growth. Remember, ASCA’s number one competitor in virtually all of its markets is Harrah’s (Caesar’s). Have you seen a Harrah’s property lately? When every nickel is going to pay down debt rather than buying slot machines from the current decade, it becomes tough to maintain share.
On any valuation metric, ASCA looks very cheap – yes even P/E! On 2012, ASCA trades at 6.3x EV/EBITDA, 8.5x earnings, and carries a FCF yield of 21%.