On Wednesday, the Supreme Court ruled Texas cannot block the Ysleta del Sur Pueblo from offering bingo games on its reservation near El Paso. Gaming company AGS (NYSE:AGS) is bullish on the high court’s decision.
The decision extends the Supreme Court’s precedent of often ruling in favor of tribal sovereignty, and could pave the way for some form of gaming expansion in the second-largest US state. Las Vegas-based AGS fits into the equation because it’s a gaming supplier to clients in Texas.
This ruling makes it possible for these sovereign Tribes to gain economic freedom and confirms their rights as federally recognized Tribes,” said AGS CEO Dave Lopez in a statement.
The bulk of AGS customers are in Florida, Oklahoma, and Texas — the former two home to some of the largest tribal casinos in the US.
Disappointing Stock Reaction for AGS
In a more sanguine market environment, AGS shares may have rallied on the Supreme Court ruling. But the current market climate is highly volatile.
On Thursday, AGS shares plunged 15.63% on above-average volume, as travel and leisure stocks were bludgeoned by concerns that high inflation and a possible recession will sap discretionary spending. While Wall Street remains bullish on AGS, the stock is down 32% since the start of the second quarter.
“Moreover, we note AGS’s tribal and commercial exposure over-indexes to states with favorable demographic trends (e.g. Florida, Alabama, Oklahoma, Texas),” writes Stifel analyst Jeffrey Stantial in a recent note. “We expect COVID-19 enabled location flexibility to yield continued net migration to these lower cost of living states, helping mitigate the potential risk of consumer spending beginning to fade.”
Some analysts believe AGS has potential for sturdy long-term margin expansion, as the company grows into what’s an impressive research and development profile. That thesis is supported by a brisk pace of new installations and sales at regional and tribal casinos, as operators renew their focus on high-margin gaming opportunities.
Texas State of Mind
Ysleta del Sur Pueblo, along with the Alabama-Coushatta — another Texas tribe — had bad timing. They became federally recognized in 1987, a year before the Indian Gaming Regulatory Act (IGRA) was passed. It remains to be seen if the tribes will push to bring brick-and-mortar casinos to Texas.
“AGS stands by our Tribal operator partners as they look to exercise their rights, and wish them success in current and future ventures as sovereign Tribes in the State of Texas,” adds Lopez.
As for the investment thesis, Stantial believes AGS sporting a free cash flow yield of roughly 20% next year and the company’s tribal exposure is favorable.
“AGS remains over-indexed to both customers and geographies likely to outperform in a recession. We estimate ~70% of EGM revenues come from tribal customers, vs. larger peers closer to ~40%. To the extent the economy does experience a meaningful downturn, we would expect tribal reinvestment into the slot floor to materially outpace commercial behavior based on historical trend,” adds the analyst.
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