AGS Texas Opportunity not Reflected in Share Price, Says Analyst

AGS (NYSE:AGS) stock could offer Texas-sized opportunity that’s not currently reflected in the share price. That’s following last week’s Supreme Court ruling that paves the way for the Ysleta del Sur Pueblo tribe to offer bingo games near its El Paso reservation.

That’s the sentiment of Roth Capital analyst Edward Engel, who rates AGS a “buy” with a 12-month price target of $11, or more than double where the stock currently trades.

After the Supreme Court recently ruled in favor of the Tigua Indians operating Class II gaming in Texas, we don’t believe this overhang removal or growth opportunity has been reflected in AGS shares,” writes Engel in a note to clients. “Prior to the ruling, investors were discounting ~$10-12M of high-margin revenues for AGS, where an unfavorable ruling would have wiped these out. Rather, the favorable ruling now presents a growth opportunity for AGS, as two tribal casinos in TX are more likely to expand casino floors.”

Ysleta del Sur Pueblo, along with the Alabama-Coushatta — another Texas tribe — could be beneficiaries of the Supreme Court ruling. So could AGS, because gaming expansion in Texas could increase demand among the company’s tribal clients there.

Texas Gaming Expansion Possible

As the second-largest US state, Texas is a coveted destination for commercial and tribal casino operators. But the state has long been reluctant to embrace casino gaming.

“The Tigua Indians operate a Class II casino in El Paso, with a local population of ~700k. The Alabama-Coushatta tribe operates a Class II casino ~90 miles from Houston, making it the closest casino to Houston, vs. the popular Lake Charles, LA casino ~140 miles away,” adds Engel. “Prior to the ruling, both tribes had been reluctant to pursue property expansions, despite evident capacity constraints in both markets. Following the ruling, we would expect both tribes to announce expansions in both gaming and non-gaming footprints.”

Most of AGS’s customers are in Florida, Oklahoma, and Texas, and the company applauded the Supreme Court decision.

For AGS, Cheap Stock, Big Opportunity

AGS could be on the cusp of something meaningful in Texas, and a case can be made that opportunity isn’t fully appreciated by the investment community.

The Tigua and Alabama-Coushatta tribes operate just ~1,500 and ~800 Class II devices, respectively, where AGS supplies EGMs to both properties,” notes Engel. “Alongside any property expansions, we would expect AGS to get its fair share of both expanded gaming floors. This implies a meaningful turnaround vs bearish expectations that AGS would lose its footprint in the state.”

AGS is discounted relative to peers, and with its stock slumping, it could deploy capital from an old buyback plan to repurchase some of its shares.

“Prior to the ruling, we believed AGS’s deep discount vs. peers was partially attributable to investors discounting Texas operations, which represented ~5% of revenues. Recent channel checks with gaming suppliers and operators indicate no softening in gaming consumption, despite investors pricing in recessionary outcomes,” concludes Engel.