Casinos generate revenue by keeping customers playing, as the odds favor the house. To achieve this, they invest in companies like Everi Holdings (EVRI) to develop slot machines and manage progressive jackpot gaming solutions. The firm has demonstrated impressive returns, yet the market appears to undervalue the sustainability of its profitability. In today’s FA Alpha Daily, we will look at Everi Holdings using Uniform Accounting to see why the market misunderstands its potential for sustainable high returns.
FA Alpha Daily:
Tuesday Company Specific
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In the casino business, you make money by keeping people playing.
Winning is all about getting lucky and not sticking around long enough for the statistics to balance everything out in the casino’s favor, as it inevitably does.
So, casinos are willing to spend a lot of money and effort to make sure people keep on playing.
Some are offering free food and drinks, while others find more technical solutions, such as pumping up the oxygen levels to make everyone energetic.
However, it all comes down to making customers feel busy and have fun.
This is where Everi Holdings (EVRI) comes in. It develops slot machines and other gaming systems. It also started to provide services for iGaming operators in the United States.
It is particularly known for managing progressive jackpot gaming solutions for casinos.
It shouldn’t be a surprise that companies are more than eager to pay for its services. After all, the hope of hitting the big jackpot is what keeps people playing and spending money.
Everi Holdings provides an essential service for casinos: making people stick around longer.
This has meant incredible returns for the business. The pandemic closed a lot of casinos, but even then, Everi generated a Uniform return on assets (“ROA”) of 18%.
With people returning to casinos, ROA has surged above the pre-pandemic levels and reached 76% in 2021, and remained above 70% last year.
The business has been booming, and it will likely be as long as the casino space is alive and well.
However, that doesn’t necessarily mean Everi Holdings is a great name to buy. If the market gets the story, there might not be any investment opportunities.
We need to know what the market expects from the company to see if we agree or disagree with it.
We can see this through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At around $17 per share, the market expects the company’s ROA to fall below the pre-pandemic levels and nearly reach pandemic profit levels.
This would comfortably be the lowest level of ROA in the last two decades, excluding the pandemic year.
Additionally, the stock trades at a very low 13.3x Uniform price-to-earnings ratio (“P/E”), sitting well below the corporate average Uniform P/E of roughly 20x.
The expectations are overly pessimistic, considering the importance of Everi’s services for casino businesses and the company’s strong position.
Everi Holdings’ high returns and the market’s misunderstanding of its sustainability makes it a great FA Alpha 50 name.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
Today’s highlight, Everi Holdings (EVRI) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.