Full House Resorts $FLL - Analysis
An interesting small cap that has undergone an absolute transformation in 2023.
Hi there!
Today, we analyse Full House Resorts an interesting U.S. small cap set to triple its EBITDA in 2024, thanks to the inauguration of its two* flagship properties in 2023. Management holds a 12% ownership stake, and over the last 10 years, they have multiplied the company's EBITDA (2023) by 5. Honestly, it's quite an interesting (and useful) read!
As always, we also include our Week in the Markets, summarizing the most important news of the week and the market's evolution.
Additionally, we provide our Portfolio Management, including all details of our portfolio and its companies.
The Week in the Markets
The primary drivers in the markets this week were the higher-than-expected U.S. Consumer Price Index (CPI) data and the ongoing escalation of tension in the Red Sea. Despite significant volatility and an initial market reaction to the downside, it appears that these factors do not significantly disrupt the overall expectation of the first interest rate cut in March (markets assign an 80% probability) and a total reduction of 150 basis points throughout the year.
We believe that this has been merely a spike in the CPI, highlighting the market's keen attention to it as it is perceived to influence the pace of the Federal Reserve's interest rate cuts. We anticipate a gradual decline in the CPI, primarily attributed to:
New lease rent increases, after a 2022 spike, have normalized, but this hasn't fully reflected in shelter CPI. Used car prices are expected to drop further. Labor market indicators suggest a slowdown, pointing to slower wage growth and specific impacts on services inflation. Consumer inflation expectations are decreasing, influencing actual inflation. Producer Price Index unexpectedly declined, potentially lowering consumer price inflation. Despite energy price volatility, WTI and gasoline prices are near the lower end of their two-year range at around $73.
The recent volatility has impacted higher-risk assets, while mega-cap stocks have staged a recovery. NVIDIA surged over 10% this week, particularly significant ahead of Saturday's elections in Taiwan. Simultaneously, Amazon, Meta, Microsoft, Broadcom, and Google (Alphabet) all saw gains of over 5%, propelling the S&P 500, particularly the Nasdaq, which rose over 3%. While the S&P 500 is approaching highs, it faces strong resistance at 4800 (currently, over 70% of index components are above their 200-day moving average).
The rise of these companies also lifted the Technology and Communications sectors, making them the best-performing sectors of the week.
It's important to note that the Mag7 are heavily reliant on Taiwanese manufacturers for over 90% of their chips, with a significant correlation with Taiwan Semiconductor (TSMC) at an all-time high of 66%. These companies constitute 29% of the S&P and 40% of the Nasdaq, making the entire U.S. stock market highly vulnerable to disruptions in semiconductor supply due to geopolitical tensions. Given the escalating tensions in the region, it is anticipated that risks associated with disruptions in the semiconductor supply chain could impact the growth stocks of mega-cap companies in 2024.
Due to our growing interest in the semiconductor industry and its obvious importance, we have reached out to an expert on this subject. We are delighted to announce that in the coming weeks, we will share an article explaining the industry's current situation, key players, and interesting insights.
On the flip side, energy stocks have faced a week marked by tremendous oil volatility due to tensions in the Red Sea - you can access the article on Crude Tankers published openly two weeks ago with one of the market's top shipping analysts. This volatility is also attributed to the impact of increased production and price cuts by Saudi Arabia.
Another notable factor is the surge in Henry Hub prices, confirming its status as the best performer of the year, driven by the intense cold at the beginning of the year, with expectations that this trend will continue. Similarly, despite declines in TTF, there have been significant drops in European Natural Gas inventories in recent days, with storage reaching 81%. While still high, it is now at levels comparable to last year and 2020 (when it had several points of advantage until last week).
However, the standout news of the week, and undoubtedly one of the year, was the approval on Wednesday of the first physically-backed Bitcoin ETFs in U.S. history. Furthermore, these ETFs set a record for the highest trading volume on the first day, with a combined volume of $4.3 billion.
Despite the initial excitement, investors have shifted to Ethereum (ETH), with expectations that it could be the next cryptocurrency ETF to be approved. We will keep commenting on this, but the next SEC deadline is at the end of May. As of writing this article on Saturday at 8 am CET, Bitcoin (BTC) is in negative territory for the week.
Other interesting news of the week includes:
Boeing's stocks have dropped over 15% this month due to the January 5 incident where an emergency exit detached mid-flight. Regulators instructed airlines to ground over 170 Boeing 737 Max 9 planes for inspections.
Hertz - Plans to sell around 20,000 electric vehicles (approximately one-third of its U.S. fleet). This year, enthusiasm for ESG and electric cars appears to be diminishing compared to previous years.
The earnings season kicks off with U.S. banks, despite JP Morgan's record-breaking profits of $49.6 billion, overall results were not favorable. Bank of America and Wells Fargo reported lower-than-expected numbers, while Citigroup met expectations but had a weak outlook. Citigroup plans to lay off almost 20,000 employees in the coming months.
Grifols (Spanish pharmaceutical company) had one of its worst weeks as Gotham Research issued a bearish report. Although Gotham didn't reveal new information, it drew international attention, and Grifols' explanations have been deemed insufficient. The Spanish CNMV has given them 10 days to provide clarification. The main concern is the relationship between Grifols and Scranton (the family company), including the possibility of diverting cash from shareholders for personal use—a hypothesis that needs substantiation. Other issues include the consolidation of assets (with corresponding EBITDA) sold in the past and the distortion of the debt ratio.
Macro Data
A very weak week from the macroeconomic data perspective, with the only highlight being the U.S. Consumer Price Index (CPI)
Europe
GDP UK MoM +0,3% (expected +0,2%, previous -0,3%)
United States
CPI YoY +3,4% (Expected + 3.2%, previous +3.1%) Core CPI +0.3% (expected + 0.3%, previous +0.3%)
Energy costs are down by -2% YoY compared to -5.4% in November, with gasoline showing a -1.9% YoY decrease (compared to -8.9%). Used cars and trucks have seen a decline of -1.3% compared to -3.8%.
Initial Jobless Claims 202k (expected 210k, previous 203K)
PPI -0,1% (expected 0,1%, previous -0.1%) - Producer Price Index measures the change in the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, which accounts for the majority of overall inflation (maybe it is interesting to talk about leading indicators in a brief educational piece other week - if you are interested in something specific for the educational section, send us an email ;) )
Reverse repo continues to drain; this week, it has fallen again, dropping from almost 2500 billion to 600 in a few months. At this pace, it seems it may dry up by March. In recent months, money market funds have withdrawn money from the repo to invest in Treasury bills due to the high interest rates.
As seen in the chart, despite a brief decline (oh, coincidentally, in the last week of the year to present a favorable year-end picture), liquidity in the system has continued to increase, and it is expected to persist (you can find the chart explanation in the Zoom of the Week from a couple of weeks ago).
With the movements this week, the market assigns an 80% probability to an interest rate cut in March, and the anticipation of six 25 basis points cuts throughout the year continues.
For the next week, we will publish the guide (and the Excel sheet with all the listed companies) of another sector we have discussed several times and believe will be very attractive in the coming months/years.
Also, due to its importance, we have contacted with an expert in the semiconductors industry and we are expect to publish an article in the coming weeks explaining its functioning (countries & companies involved,..).
Full House Resorts Analysis
Introduction
Full House Resorts is a US small-cap company in the Resorts & Casinos industry. It owns and operates seven casino facilities in regional U.S. markets, including Colorado, Mississippi, Illinois, Indiana, and Nevada.
$FLL went public in 1993 and was a microcap for many years (Its market cap was less than $50MM until 2015). In fact, the former board was trying to sell the company in 2014, which led to a shareholder coup to gain control of the board, resulting in the removal of the former CEO and the appointment of Mr. Lee as CEO, a position he has held until today.
Mr. Lee is a distinctive CEO who typically speaks plainly about his thoughts. His leadership has transformed the company from a nanocap that produced barely $10MM EBITDA to a company that is expected to close this year with more than $50MM and is expected to double this amount in the next two years.
The explanation for this is that 2023 has been a transformational year for the company with the opening of its two largest casinos/flagship projects. The Temporary, opened in February and operational while The American Place is built (more about this later), and Chamonix, opened on December 27, 2023. Its contribution to EBITDA23 is almost nil.
Full House Resorts, which has lost more than 50% of its market value in the last 12 months, has caught our attention not only due to imminent catalysts on the horizon but also because of the tremendous story of transformation and growth since the current CEO and his team took over.
Today's analysis, conducted after reviewing all the 10Ks from the years under the current management and the 10Qs and Conference Calls from recent years, explains in detail its properties, management, capital structure, the size of the opportunity (with forecasts of revenues, EBITDA, debt model, interest payments, etc.) and analyses in detail the present risks that we have identified.
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