PlayAGS Debt Reducing Efforts Applauded by Analysts

On a dismal day for the broader market and gaming equities, gaming device manufacturer PlayAGS (NYSE:AGS) cobbled together some upside following a solid fourth-quarter earnings report.

PlayAGS
A scene from a PlayAGS gaming machine. Analysts say the stock is cheap. (Image: Overlooked Alpha)

Obviously, those results are in the past and while the slot machine maker didn’t offer up specific earnings guidance for the current quarter, the Las Vegas-based company said it is attempting to drive leverage down to a range of 3.25x to 3.75x. Analysts applauded the effort.

(That) implies earnings before interest, taxes, depreciation and amortization (EBITDA) guidance of ~$130 million-150 million; however, management noted at current levels, they would achieve midpoint or better, implying $140 million-plus,” wrote Macquarie analyst Chad Beynon in a note to clients today.

He reiterated an “outperform” rating and an $11 price target on PlayAGS stock, implying upside of 65.1% from the March 9 close. The fourth quarter of 2022 marked the ninth consecutive three-month period in which the company topped analysts’ EBITDA estimates.

PlayAGS Has Makings of Value Play

Assuming PlayAGS does in fact generate 2023 EBITDA in the $140 million, that could imply the stock is deeply discounted at current levels because $140 million is more than half the company’s current market capitalization of $233.36 million.

Based on Beynon’s 2023 EBTIDA estimate of $144 million, PlayAGS trades at an enterprise value/EBITDA multiple of just 5.5x with a free cash flow yield of 14%. As the analyst notes, there potential 2023 drivers with which PlayAGS can close the valuation gap with peers while possibly accruing share price appreciation.

“With ~70% of the business model recurring and domestic installed units in a solid place, AGS is well positioned to build the business in ’23 from higher unit sales (we’re projecting high singles), continued premium installed placements, higher table revenue from the PaxS and growth in interactive (new game content/deals). Bottom line, while we’re still forecasting mid[1]singles revenue/EBITDA growth, current trends (record Jan) and 2H catalysts could prove this to be conservative,” added Beynon.

PlayAGS Can Compress Valuation Gap

The Macquarie analyst isn’t alone in his thinking on PlayAGS. Stife’s Jeffrey Stantial observed that if the company properly executes this year, prior research and development and related offers could pay-off for investors.

“Despite already impressive growth in premium installs over the past two years, we see significant runway still left (peers average >40% mix) with the timing of R&D investments suggesting momentum should continue through 2023. Management also highlighted product momentum in non-premium leased content, buffered by the successful launch of Spectra and initial high-denom content,” wrote Stantial.

He reiterated a “buy” rating on PlayAGS with a $10 price target. The average price forecast on the name is $11.13.

Entering Friday, the stock was up 29.80% year-to-date, making it one of the best-performing gaming equities of any stripe.

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