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Bear of the Day: Monarch Casino and Resort (MCRI)

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Today’s Bull of the day is the gaming giant that parlayed its reputation as the most famous horseracing venues in the world – and the home of the Kentucky Derby. In addition to having premium product offerings, that company is ideally positioned to take advantage of its presence in the online gaming market.

The gaming market continues to evolve

It’s exactly that type of pressure that makes Monarch Casino and Resort (MCRI - Free Report) our Bear of the Day. The company operates two more traditional casino properties in markets that not only aren’t growing, they’re losing market share to more innovative competitors.

With the Atlantis Casino in Reno Nevada and the Monarch Casino in Blackhawk, CO (40 miles west of Denver in a former mining town), Monarch Casino & Resorts is positioned at the low-end of the spectrum of gambling options.

Nevada Gaming operations used to enjoy a built-in competitive advantage because they were really the only state that widely allowed casinos and people from all over the country traveled to wager and stay at those properties.

The widespread proliferation of other options across the country – including Native-American owned casinos as well as riverboat gaming operations means that most Americans have access to Casino gambling without the long trip to Nevada.

The high profile Las Vegas resorts reinvented themselves as eclectic entertainment centers that included gambling, but also offered other entertainment options like waterparks, live entertainment and spas. They’ve kept up the number of tourist visits by offering more reasons to come.

The best gaming companies are also building and maintaining a strong internet presence – which will be especially valuable as regulations regarding sports wagering continue to relax.

Smaller gaming properties tend to be more economically sensitive, with results fluctuating with the financial situation of their local audiences. When people are feeling relatively wealthy, they tend to enjoy luxuries like gaming. When things are tighter, trips to the casino are an easy recreational option to jettison.

Monarch Casino & Resort has been showing anemic, single-digit growth in revenues lately and declining net earnings, even in an economic climate that includes record-low unemployment and interest rates and rising wages and GDP.

These should be the best possible times for a casino operator, and Monarch’s unimpressive results show that the company could be in real trouble in an economic downturn.

Recent net earnings estimates have been falling, with the Zacks Consensus Estimate for the current quarter dipping 10% in the last 90 days to $0.43/share. Full year estimates have fallen by a similar amount, from $2.08/share to $1.89.

Those net earnings still leave MCRI at a forward P/E valuation of 22.5X, well in excess of the industry average and the S&P 500.

Thanks largely to those reduced estimates, Monarch Casino & Resorts is currently a Zacks Rank #5 (Strong Sell).  

The gaming industry is constantly evolving, providing opportunities to the companies that can reinvent themselves and leaving others in the dust. Investors in the space should carefully consider companies that continue to offer customers more of the experiences that they demand, like Churchill Downs (CHDN - Free Report) and steer clear of stagnant operations like Monarch Casino & Resort.

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