2024-01-15 00:01:34 ET
Summary
- Accel Entertainment is a distributed gaming operator specializing in video gaming terminals in non-casino locations.
- Despite fluctuating revenue growth due to COVID-19, ACEL has expanded its margins and returned to profitability.
- Strong growth trend in gaming terminals is expected to drive future growth.
- Combined with a double-digit upside potential, I am recommending a buy rating for ACEL.
Synopsis
Accel Entertainment ( ACEL ) is a distributed gaming operator in the US. It specializes in the installation, maintenance, and operation of video gaming terminals, primarily in non-casino locations.
ACEL’s past revenue growth rates have been volatile due to the impact of COVID. Despite that, it managed to expand its margins and return to profitability. In its most recent quarter’s earnings, it continues to report robust revenue growth while margins remain stable year-over-year. Looking ahead, the strong growth in gaming terminals is expected to positively influence ACEL’s future growth. This tailwind, coupled with double-digit upside potential, leads me to recommend a buy rating.
Historical Financial Analysis
Over the past four years , ACEL’s revenue year-over-year growth rates have shown significant fluctuations. In 2020, revenue growth decreased due to COVID-19. In 2021, revenue growth rebounded strongly when COVID eased and economies around the world began opening up. In 2022, revenue growth slowed down to ~32%, in line with the 2019 pre-covid era’s growth rate. Although revenue slowed down, it is still growing strongly at double-digit rates.
Author's Chart
Despite fluctuating revenue growth, ACEL managed to expand its operating income margin [OIM] and net income margin [NIM], although I do notice a slight contraction in its gross profit margin [GPM].
In 2019 , NIM was negative due to rising operating expenses and non-deductible expenses, which led to an increase in tax payable. These expenses were non-deductible as they were associated with business combinations and executive compensation. However, by 2021 and 2022, ACEL reported positive NIM of 4.30% and 7.64%, respectively, showing great signs of improvement.
Author's Chart
Moving onto its balance sheet, I will be analysing its debt-to-equity [D/E] ratio, as it will give us insights into its financial health. Since 2020, its D/E ratio has been stable, indicating no significant increase in leverage. This is important because rising debt equates to higher interest expenses, which might eat into its modest NIM.
Author's Chart
Analysis of ACEL’s 3Q23 Earnings Results
ACEL reported a strong 3Q23 earnings result. Total revenue for the quarter grew 8% year-over-year to ~$287 million. Location increased 5% year-over-year, while total gaming terminals increased 7% year-over-year, showing strong growth and demand for ACEL’s products.
The drivers of this strong revenue growth were primarily attributed to the addition of new locations in Illinois and a modest 1% growth in same-store sales. Additionally, there was some growth in developing markets where ACEL continued to add locations and attract new players. This performance was highlighted as a demonstration of the strength of ACEL’s hyper-local business model.
Moving onto margins, ACEL’s 3Q23 has shown robust performance. It was mostly flat on a year-over-year basis except for 3Q23’s NIM. As stated in their earnings report, net income for the quarter decreased ~53% year-over-year due to a $1.6 million loss on the change in the fair value of its contingent earnout shares. On an adjusted basis, ACEL’s adjusted NIM is actually in line with the previous period.
With such robust margins, I anticipate ACEL will maintain these margins moving forward. In addition, management’s discussion on ACEL’s expenses also supported my outlook. Due to ACEL’s supplier managing to iron out supply chain issues and provide parts in a timely fashion, ACEL is able to manage parts costs, which bolsters margins as there are ample supplies.
On the expense side, our cost structure continues to remain stable, despite the inflationary impacts on labor and other expenses such as parts. Our vendors have worked through nearly all of the supply chain disruptions and are now able to provide parts on a timely and consistent basis.”
Author's Chart
Solid Growth in Video Gaming Terminal
Based on the following chart provided by the American Gaming Association , in 2022, the combined revenue generated from video game terminals [VGT] in non-casino locations across seven was more than $6.05 billion, representing a growth rate of ~25% year-over-year. Over the last 10 years, the US VGT market has demonstrated continuous and robust growth with Illinois growth being the highest, and it is not showing any signs of deceleration.
American Gaming Association
Strong Growth in Illinois
Illinois continues to be the largest market for VGT because, in 2022, the state's ~45,000 VGT brought in a total of $2.71 billion in revenue, significantly higher than the rest of the six states mentioned in the report.
In addition, gamblers in Illinois are placing more bets on VGT than on other forms of betting. Currently, the lottery is still Illinois’ largest source of betting revenue, but VGT is set to outperform it as tax collection from VGT accounts for nearly 41% of the state’s total betting revenue vs. the lottery’s 44%.
In 3Q23, ACEL’s capital expenditure increased year-over-year due to accelerating purchases in Illinois. I expect its investment in Illinois will strengthen and support its future revenue growth, given the strong growth witnessed in that state.
Bloomberg
Comparable Valuation Model
In terms of market size, ACEL is larger than its competitor’s median. ACEL has a market capitalization of $853 million, while the median is $724 million, representing ~1.18x over the median.
With its larger size, it has a better forward revenue growth outlook of 17.25% vs. the median of 10.06%. However, when it comes to profitability, ACEL significantly underperformed its competitors. In terms of gross profit margin, ACEL reported 30.04%, while its competitors’ median was 63.40%, twice as much as ACEL. Moving onto net income margin, it also echoes the same sentiment. ACEL’s net income margin is 3.74%, half of the median of 7.07%.
Currently, ACEL’s forward EV/Sales of 0.98x are trading lower than its competitors’ median of 2.1x, and this represents a discount of ~50%, which I argue is too much. Over the last few months, its share price has been falling, which has resulted in its EV/Sales contraction. When we look at ACEL’s 1-year average EV/Sales, it’s ~1.05x, and I believe this multiple is much more reasonable.
The market revenue estimate for ACEL is expected to reach $1.16 billion in 2023 and $1.18 billion in 2024, while the market estimate for ACEL’s 2024 EPS is $0.85. I believe these estimates to be reliable, as my discussion on its strengths and growth catalysts above supports these estimates. By applying its EV/Sales of 1.05x to its 2024 EPS estimates, my 2024 price target is $11.33, and this represents an upside potential of ~13%. With double-digit upside potential, I am recommending a buy rating for ACEL.
Author's Valuation
Author's Valuation
Seeking Alpha
Seeking Alpha
Risk
One downside risk would be related to the growth seen in Illinois. If the strong demand and growth of VGT in Illinois start to diminish, it will potentially slow down the growth of the total VGT market in general. Currently, the only advantage ACEL has over its competitors is its growth outlook. In terms of profitability, it is significantly behind them. If the growth outlook were to be lowered, we might see ACEL’s multiples revise downward.
Conclusion
ACEL’s past four years have shown fluctuating revenue growth due to the impact of COVID. Despite the fluctuation, its margins continued to expand over the years, most notable would be its net income margin. In addition, it managed its D/E well, as it has been stable over the years. In 3Q23, its revenue continued to grow, and margins were stable year-over-year on an adjusted basis.
Over the last few years, the US VGT market has been consistently growing, with Illinois taking a massive lead. Looking ahead, I expect that the strong growth in this market will provide ACEL with the tailwind needed to grow in the future. In my conservative valuation model, my target share price for ACEL indicates 13% upside potential. With that, combined with the strong growth in the VGT market, I am recommending a buy rating for ACEL.
For further details see:
Accel Entertainment: Strong Growth In Gaming Terminal