On Monday, Wells Fargo (NYSE:WFC) started coverage on Golden Entertainment (NASDAQ:GDEN), giving the stock an Overweight rating and setting a price target of $38.00.
The firm highlighted Golden Entertainment's robust balance sheet, which features net leverage at twice the company's earnings, as well as its ownership of real estate and a history of mergers and acquisitions that provide attractive options for growth.
According to the firm, Golden Entertainment has the potential to generate approximately $1.1 billion in gross proceeds through sale/leaseback transactions, which could value the company at $40 per share or more, representing a 20-30% upside. The company's share buyback program was also noted, with Golden Entertainment repurchasing roughly 6% of its shares outstanding in the year to date.
The firm estimates the value of Golden Entertainment's land, primarily located near the STRAT hotel and casino, at around $80 million, or over $3 per share. Despite a challenging year, the firm anticipates that the company's fundamentals will stabilize in 2025. This outlook is supported by expected improvements in midweek occupancy rates at the STRAT and stable performance in local markets and taverns, with potential for increased earnings and slot handle growth.
Golden Entertainment's valuation was deemed attractive, trading at 7.6 times its estimated 2025 enterprise value to EBITDA (EV/EBITDA) and 6.9 times its 2026 estimate. This valuation is considered a discount compared to its historical forward-looking average of approximately 9 times and regional peers' average of around 8.3 times. The $38 price target is based on the assumption that Golden Entertainment can trade at an 8% free cash flow yield for 2025, which is consistent with the current trading of Boyd Gaming (NYSE:BYD (SZ:002594)), a company with similar characteristics in terms of stable fundamentals and strong balance sheets.
The firm also pointed out that due to its lower leverage and interest expenses, Golden Entertainment has a higher free cash flow conversion of 55% compared to Boyd Gaming's 40%.
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