Analyst Bullish on ‘Underappreciated’ Twin River, Sees Upside of More Than 25%

Posted on: June 22, 2019, 04:00h. 

Last updated on: June 21, 2019, 11:45h.

Twin River Worldwide Holdings, Inc. (NYSE: TRWH) – a casino operator that has been public for just over two months – is already drawing bullish praise from analysts.

Twin River executives ring the opening bell at the New York Stock Exchange on the company’s first day of trading, March 29, 2019. (Image: Livestream)

In a research note published June 20, Union Gaming analyst John DeCree initiated coverage of the owner of the Tiverton Casino in Rhode Island with a “buy” rating and a $38 price target, implying upside of 25.45 percent from Friday’s close of $30.29.

Twin River is an underappreciated, catalyst-rich, regional small/mid-cap gaming company with a solid balance sheet, strong free cash flow generation, and a proven track record of accretive mergers and acquisitions,” said DeCree.

In addition to the Tiverton Casino, Twin River owns and operates the Twin River Casino Hotel, which is also located in Rhode Island; Dover Downs Hotel & Casino in Dover, Delaware; Hard Rock Hotel & Casino in Biloxi, Mississippi and the Arapahoe Park racetrack in Aurora, Colorado.

Baby Being Tossed With The Bathwater

“Don’t throw the baby out with the bathwater” is a centuries old idiom that is widely used on Wall Street to describe selling of a good stock when investors are parting ways with related, but more flawed equities in the same sector or industry.

That may be what is happening to Twin River in June. Month-to-date, the shares are down 5.23 percent amid concerns about the US/China trade imbroglio and the competitive threat presented by Sunday’s opening of Wynn Resorts. Ltd.’s (NASDAQ: WYNN) Encore Boston Harbor. DeCree contends that regional gaming operators, such as Twin River, have been unjustly affected by international trade tensions.

“TRWH fits right into our ongoing thesis that U.S. regional gaming companies have been unfairly coupled to the US/China trade tensions,” said the analyst. “We contend that the U.S. macroeconomic environment is still strong and fundamentals for regional gaming remain encouraging.”

The analyst also believes investors are overreacting to the potential impact Encore Boston Harbor could have on Twin River’s New England market share.

“One of the reasons TRWH is trading below fair value is concern around the opening of Encore Boston,” he said. “We are estimating a 13 percent decline in revenue at Twin River, which is less than the commonly discussed 20 percent impact.”

DeCree said TRWH’s Rhode Island properties have some advantages over Encore Boston Harbor, including better parking and legalized sports betting.

The analyst said that with the “monopoly-like status” of Twin River’s two Bay State properties, if sports gambling there can replicate the success seen in New Jersey, that could add another $1 to $2 of value to TRWH shares.

Rewarding Investors

Twin River recently announced it will spend up to $250 million on dividends and share buybacks, an impressive sum for a newly public company with a market capitalization of $1.24 billion.

DeCree estimates the company will generate $104 million, or $2.54 per share, in free cash flow next year and that TRWH could afford to allocate half of that to dividends.

“Assuming TRWH would be willing to pay out 50 percent of levered free cash flow in dividends, we estimate the annual dividend per share could increase 3-fold to a $1.20, representing a 4 percent yield on the current share price and 3 percent on our $38 price target,” said the Union Gaming analyst.

Free Cash Flow Defined

Free cash flow (FCF) is the cash a company has left over after it has allocated capital to general corporate purposes, such as real estate assets, factories or business reinvestment. FCF is not the same thing as a company’s per share earnings or its net income. FCF does not include a firm’s interest expenses.

Some investors prefer FCF over earnings per share when assessing a company’s profitability because the former is cleaner and more difficult to manipulate than earnings.