Gaming Suppliers AGS and Everi Offer Big Upside Potential, Says Analyst

Posted on: July 6, 2022, 03:00h. 

Last updated on: July 6, 2022, 03:26h.

Gaming supplier stocks, such as AGS (NYSE:AGS) and Everi Holdings (NYSE:EVRI), are following the broader complex of casino equities lower this year. But at least one analyst sees room for significant upside with these names.

AGS slot machines. An analyst is bullish on gaming supplier stocks. (Image: Twitter)

In a note to clients today, B. Riley analyst David Bain says the firm is bullish on the casino supplier industry, noting it could prove resilient in a recession, and that AGS and Everi are the top ideas in the group. He has a $16 price target on AGS, more than triple where the shares closed yesterday. His $35 forecast on Everi is more than double where the stock finished on Tuesday.

The analyst points out both stocks reside at multiples that are deeply discounted relative to historical averages, and both have potential to be sturdy in the event of economic contraction.

Casino suppliers have historically proven mostly resilient to recessions and inflation, and a new casino floor capex cycle has emerged following two years of trough slot buying driven by COVID casino shutdowns,” notes Bain.

Another reason analysts are favoring Everi is the company’s robust free cash flow (FCF) capabilities, which create opportunities for elevating shareholder rewards, such as buybacks.

Catalysts Abound for Gaming Supplier Stocks

One reason AGS and Everi could be durable in a recession is that both companies derive significant portions of revenue from tribal clients.

While Everi’s fintech story is an increasingly prominent part of the equity thesis, it’s also still in its early innings. The company’s gaming device business is levered to the ongoing recovery in visitation levels at the Las Vegas Strip and regional and tribal casinos. That’s while its fintech operation is tethered to the still-nascent move by operators to cashless gaming. Most of AGS’s customers are in Florida, Oklahoma, and Texas.

“EVRI and AGS game sales and gaming operations are more heavily weighted to tribal markets than peers. Demonstrating tribal market resiliency, 1996 to 2019 tribal gross gaming revenue (GGR) growth has averaged 8.2%, declining only in 2009 by 1%. US commercial GGR has averaged 4.3% growth in the same period, and has declined twice, 3.5%/5.4% in 2008/2009,” adds Bain.

Conversely, historical data confirm Las Vegas GGR declines are more severe during recessions. Specific to AGS, that gaming supplier has the added catalyst of potential gaming expansion in Texas.

Gaining Market Share

Critical to the gaming supplier stock thesis is data confirming both AGS and Everi are gaining market share. Fintech and higher end slot offerings are driving the latter’s market share increases.

“EVRI has consistently gained gaming operations wallet share, averaging 10.2% amongst publicly traded peers since 1Q21 from 7.7% in 2019,” says Bain. “Game sales wallet share has averaged 10.8% versus 7.4% in the same period. EVRI continues to have success in mechanical with its Player Classic line and recent premium cabinet launch Flex performing well-above house averages.”

Relevant to both AGS and Everi is the point that casino operators are upping slot machine buys. Bain says those purchases could jump 35% in 2022, and surge again in 2023.