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Barel Karsan
Barel Karsan

Stacked Deck At Full House Resorts

September 08, 2012 | About:

Full House Resorts (NASDAQ:FLL) has all the makings of a great value stock. With a market cap of only $50 million against double-digit millions in free cash flow and a strong net cash position, the company looks seriously undervalued.

But what you see isn't what you get. The company intends to acquire a company for $70 million, which is more than Full House's current market cap! The acquisition will thus be funded by around $50 million of debt, which all of a sudden makes the company no longer look so safe.

To a large extent, the gaming industry in the US is protected by regulation. Permits aren't so easy to come by, and threats from online entrants have been limited by federal measures aimed to keep online gambling out. But such a situation may not last forever. Many US citizens value freedom while many lobby groups are willing to spend big money pushing for change, and so there will occasionally be attempts to lessen restrictions. Recently, states have been looking to increased gaming revenue to help cover budget shortfalls. Things aren't calm on the online front either; in a recent example, some US senators are currently pushing for the legalization of online poker.

Under the reported financials as they currently are, such remote possibilities as online gaming entrants and additional bricks and mortar competition may have few repercussions for Full House shareholders. But as Full House takes on a few years worth of debt following the acquisition, long-term risks become a threat to downside protection.

This situation serves as an example of why investors can't invest on the basis of screens and reported financial information. Only by digging further can we see that a company's situation may be vastly different than its current financials would indicate. Buyers beware!

Disclosure: No position

About the author:

Barel Karsan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 2.2/5 (9 votes)


Valueaki - 5 years ago    Report SPAM
I believe last I read they had a $20 million credit line with Capital One ready as well. Making the entire $70 million acquisition with debt.

Still, most casinos sell for ~5.0x EBITDA. I believe, on a pro-forma basis, FLL is still undervalued at ~3.0x.

But your right, the leverage makes this one a little scary.

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