Friday, October 28, 2011

Occupy Wall Street & Some Police Brutality.

From here:

While I have not talked much about Occupy Wall Street on here, regardless of your views on the movement, this kind of behavior by the police is completely unacceptable. Apparently, the Department of Justice isn't going to investigate...

I am not going to say that all police officers are bad, or even that they are all good. What I will say, is that the officer(s) that are responsible for this incident should be fired, barred from every form of governmental law enforcement, and held criminally responsible if any laws were broken.

Tuesday, October 25, 2011

Pearls Of Wisdom From YouTube Commenters...

Here, we see a speech that Charlie Munger gave to USC Law students.

As usual, the wit and wisdom of Charlie Munger was great. However, something unusual bot surprised and stuck out to me. By chance, I happened to see a comment that was left about a year ago... It puts something that I said a while back in a different perspective (hint: my observation on page views holds true for this series!). Anyway, I liked the comment enough that I thought I would share it with you:

"It's quite amazing to think lady gaga has 150 million views and one that has profound life changing ideas and thoughts only has 6 thousand. Those that find the acquistion of wisdom as entertaining are at an enourmous advantage when it comes to success and achievment."


AG Trucano

Nevada Gold recently announced that it had come to an agreement to buy all of the outstanding shares of AG Trucano. Trucano is, by far, the largest operator of slot machines in Deadwood, SD. While most of the specifics of the deal have yet to be disclosed, I am presently optimistic...

I believe that the company has made an acquisition that is going to immediately generate a tremendous amount of revenue. When looking at the stats in this presentation that the company gave, the operator makes up approximately 24% of the slot machines in Deadwood…

Looking at the most recent annual report for gaming operation in South Dakota, we see that there was approximately $95.5 million in revenue generated by slot machines... If 24% of this went to AG Trucano (which, may not hold true due to revenue distribution) and there are no major changes in the South Dakota Gaming market, we can expect for Nevada Gold's revenues to go up by just a hair under $23 million... This is pretty significant for a company that has generated around $55 million dollars in revenue in the trailing 12 months.

Considering that the company paid ~4x trailing EBITDA, or $5.2 million (per the presentation that I saw at the annual meeting), that implies additional EBITDA of $1.05 million. If they get up to just 15% EBIDTA margins on, say, ~$25 million in revenue, that would imply additional EBIDTA of just under $4 million at some point in the future… Even if revenues for Trucano fall to $20 million, they will still be flying.

Another thing that I like about the acquisition is that the previous CEO remains with the company. I would imagine that to keep the purchase price down, that is part of why the company issued $100K in restricted stock, which may have some juicy conversion rights,will not only incentivize CEO to stay with the company, but, to also make it run well; he now effectively gets some of the upside of operations, plus whatever multiple the market assigns to it, which is something he didn't have nearly as much of as a private company! The debt structuring is also something that I really like. UWN used of a fair amount of cash in the purchase price, which indicates (to me) that management is sure of it's present operations and Nevada Gold's ability to grow using debt via Wells Fargo, seller's paper, stock, debt instruments via the recently filed S-3, etc...

Check this out to look at some of the legislation in effect in South Dakota for gaming. It seems that there are protections in place to shelter present operators from competitors coming in. Furthermore, if you look at the demographics of the area, there are a lot of older people there, who are typically the types of people playing slot machines. It is nice to know that generally, they have pretty steady incomes (pensions, Social Security checks, and the like), and, are living longer lives... As a result of this, I am hoping that this will keep revenues in the area relatively steady. Additionally, when looking at the demographics, while the population of Deadwood has been declining, the population of the county is more than making up for the decline. Furthermore, the populations of South Dakota and Wyoming (which is really close to Deadwood) have been growing. Again, not bad trends to see.

With all of this, is there any bad? While a smoking ban seemed to hurt revenues, it will ultimately keep the populous alive for a longer period of time, which, is never a bad thing (especially when it's one of the few places they can go to gamble). If we have learned anything from the company's filings, smoking bans don't kill operations in the long run; take a look at EBIDTA margins at the property in Cripple Creek.

As we have seen in the past, Nevada Gold generally does a great job of improving operations; just look at what they have managed to do with everything they have bought. I have no reason to believe that this acquisition will be any different. When a place is presently generating EBITDA margins of <5%, on a product offering that is generally pretty high margin, I am hopeful for there to be significant upside in operations...

All this said, the devil could lie in the details, which the company says it will disclose with their next 10Q. I anxiously await to read the filing. It will be the first one where we see operations for a full quarter of the Red Dragon.

Disclosure: I am long UWN. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

When Syms Loses, It's Shareholders Win...

Below, we find out that Syms was denied an appeal that it requested in regard to a previous ruling over turning it's books over to it's largest independent shareholder. It seems that Andrew Sole at Esopus Creek has this crazy notion that where he needs to make sure that there is nothing funny going on with the company and that it is being run for all shareholders... After all, it isn't like Syms has historically been un friendly to shareholders.

Oh, wait a minute, Syms actually does have one of the worst reputations that I can imagine when it comes to the equal and fair treatment of shareholders (it's right up their with Itex and Northeastern Auto Holdings)... At the annual meeting, they took my cell phone from me!

Syms Denial Of Stay

Frankly, as a shareholder of the company, I am getting quite sick of Syms' management ignoring my, other shareholders, and the legal systems wishes for them to turn over their books. It is not only a waste of company resources (it isn't like they are drowning in cash or anything), but is also a waste of their efforts, as they should be focusing on unlocking value for shareholders. If the company would have pursued any strategy as intently as they have in not turning over their books, they might not of needed to sell off some valuable real estate and close 6 stores.

While I am guessing that Syms will continue doing all that they can to delay this decision, I will count this as another win for minority shareholders and corporate transparency.

Disclosure: Long Syms. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Tuesday, October 18, 2011

Syms Store Closings.

Here is something that doesn't come as a surprise: Syms has made the decision to close 4 of it's Filene's stores. This has been something that I have been expecting, especially when looking at how the company's leases are expiring (from the 10K) and their mounting losses.

This will likely impair earnings, but, should be largely a non-cash charge... Anybody remember the "bargain purchase gain" that helped to make them profitable? Well, I am guessing that this will in part come out of that, and a decent bit from intangibles...

The inventory being liquidated should help out the cash position a bit, which, if the most recent quarterly is any indication of, will be nice, since the company doesn't have any individual assets left for sale... Rather, the whole of the company is supposedly for sale.

It is a crying shame that the company has gotten to this point... There are a plethora of ways in which to unlock value... Most of which, involve the company ceasing to operate as we presently know them.

EDIT: Add another 2 stores to that figure...

Disclosure: Long Syms. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Wednesday, October 12, 2011

Shit My Dad Says.

OK, so, it isn't really Shit that MY Dad says, but, there is a great site, called "Shit My Dad Says." Basically, it is just this guy who writes all the hilarious shit that his dad says. And believe me, it's great... I would liken him to a less wealthy Charlie Munger who is more straight forward (who would have ever thought that?).

For example, the most recent thing that he posted was this:

"There won't be humans in 500 years. Enough people choke themselves when they jerk off we gave it a name. We ain't a species made to last."

Here is another one:
"You don't have to be good to succeed. You just gotta be the least shitty option. Example: We're eating at The Olive Garden."


Anybody that is that bold certainly deserves my respect. Well, maybe not my respect, but, they deserve something. Anyway, as it had been a while since I read the site and I wanted a break from other stuff, I figured I would read some older posts...

I was going through some older posts and came across one from the most recent Father's Day. I encourage you to read the whole thing (I'd post a snip of it for you, but, the formatting is really weird, and frankly, I don't feel like taking the time to fix it)... It's just a few pages and takes about 2 minutes to read.

I think that it really does a lot to show how different things are now than they were when the story took place. If the protesters on Wall Street would take a step back and realize how good we have it, they may look at things a bit differently.

Monday, October 10, 2011

The Frog's Kiss.

Rather than link to the numerous posts on the site that I like, I will simply come out and say this:

"The Frog's Kiss is the best new investment blog out there. Period."

As for my one criticism, I think that it is unfortunate that the author (who I have not talked to) seems to be bent on getting an analyst job. He should probably just thumb his nose at the industry and open his own fund. From what I have read, I would rather him manage my money than most. Hell, generally speaking, I would generally rather a handfull or two of my favorite bloggers manage my money than most established firms out there. Unfortunately, some of them quit blogging once they started a fund or went into the industry in another capacity. But, I suppose that is a subject matter for a different post.

Disclosure/Disclaimer: None. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

ITEX Gets Sued.

The activist shareholder group (the Polonitza Group) has finally come out with a derivative lawsuit against ITEX. It's hard to say what will happen, but hopefully, the company will begin to allocate capital in a method that doesn't seem to entrench management, but rather, benefit all shareholders.

The time frame for this is pretty much undeterminable (as we have learned with Syms), but at least the ball is rolling. If recent history continues to play out, this story will be great fun to watch unfold.

As an interesting side note, this previous article that I did was quoted in the suit.

Disclosure: No position in Itex, but I do own shares of Syms. This is not advice of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Friday, October 7, 2011

Military Drones and Viruses...

Holy crap... The idea that there is a keystroke recording virus on our military drones is pretty frightening.

Snip (from here):

The computers used to control Predator and Raptor drones used in Afghanistan and other war zones have been reportedly infected by a virus that captures the keystrokes of the pilots operating the unmanned aircraft.

Although detected two weeks ago by the military's network security systems, the military has been unable to purge its computers of the apparent keyboard logger, Noah Shactman reported Friday in Wired's Danger Room blog.

“We keep wiping it off, and it keeps coming back,” a source familiar with the network infection told Shactman. “We think it’s benign. But we just don’t know."

Just imagine if the virus could somehow transmit such activities to adversaries... It would certainly hurt the logistical use of drone planes. They would also potentially be a lot easier to detect, track, evade, and even shoot down. Certainly not desirable if trying to kill a terrorist.

Then again, knowing a virus exists on your system, and no way to get rid of it is kind of frightening for our government to have to deal with too...

Syms, A Terrible Quarter, And Why I'm Still Long.

After reading the Syms' newest 10Q, I am almost (but not quite) shocked by how bad the results were. However, I am still long the stock.

In light of the mounting losses, it seems that the company will be forced to do something, which could involve the sale of a lot of assets... They did sell, since the end of last quarter, a small piece of their real estate pie (in Tampa) via a sale leaseback for $3.8 million, despite being on government tax records for well under $3 million. The lease only lasts until the end of the year and has a 1 year renewal option. This may indicate that they are trying to liquidate the inventory of the store this Christmas season, though, there is no way of knowing what is going on inside of the company.

Syms also sold off a store in North Randall Ohio, which, I believe to be a Filene's location. I am curious as to the specifics of this, as, I am not under the impression that they actually owned the real estate, which, would indicate that they literally just sold the store off to TJ Maxx or something alone those lines.

Looking at the screen shot below, the company doesn't appear to have any assets held for sale, which, is interesting to say the least. Additionally, it appears that the company has significantly less inventory now than they did a year ago, though, in the previous year, they did have a surge of it.

Overall, I am disappointed with results, but, am not unhappy with my decision to still be long the stock. The company may be getting it's back against the wall, and forced to do something drastic. That said, a turnaround is still possible. This filing, which showed a high amount of losses, is the epitome of why I will only invest in a turnaround play if there is already a huge margin of safety in the assets of a business... Specific to this situation, in the event that the turnaround doesn't happen, I am still relatively protected by a mound of real estate. On the positive, a lot of the losses were due to non-cash charges such as depreciation, so, the situation isn't necessarily so dire in the short term.

Disclosure: Long Syms. This is not advice or a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Thursday, October 6, 2011

Syms Appeals...

In effort to keeps it's books out of the eyes of the very people that want to ensure that the company is being run for the benefit of all shareholders, Syms continues it's efforts to not turn it's books over to shareholders.

This comes, despite the fact that Esopus has provided more than enough evidence (as called for, by law) to warrant an examination of the company's books... It is a pity that Syms is continuing it's efforts and resources on things other than turning the company around and stopping mounting losses.

To pay homage to the late Steve Job's, my thoughts on Syms, the turnaround, and this court case are along the lines of his remarks on a certain executive that ran Apple when he was separated from the company.

"The management and board of Syms are continually trying to right the direction of the ship, while there is a big hole in the hull, causing the hole thing to sink."

Esopus - Oct 3- Appellate Reply Brf

Disclosure: Long Syms. This is not advice or a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.

Tuesday, October 4, 2011

The Big Deal: Electronic Scratch Ticket Games and Nevada Gold.

Before my interview with Bob Sturges, I had absolutely no idea how good the legalization of Electronic Scratch Ticket Games (ESTGs) in Washington state could be for the casino market up there... I had an idea, but, nothing like I now think. As a result, I had no idea how good these new games could be for Nevada Gold.

After the interview and doing a little bit of math, it seems pretty apparent to me that if these things are legalized, it will be one of those moments where the company's profitability could go up by multiples and it's revenue could more than double. Before you get excited and say that I am overblowing this (in either direction), let's take a look at why I think this.

Please be sure to read my disclosure/disclaimer, as, there could be something incorrect in this post. The purpose of this post is for me to kind of outline my thoughts on the potential legislation, as well as it's potential reprecutions for the price of the stock. While value investors generally don't put much weight on developments that may or may not come, it is important in my mind, to think about such possibilities and to figure out how you would react. Many times, people will say something to the effect of "Hey! This stock just doubled! I should sell it!" without actually giving much thought as to the intrinsic value that would likely be created by such legislation if it is passed. For me, if the video lottery is legalized, and the price of the stock doubles, going on the information that I have now, there isn't a chance in Hell that I would sell my shares. In fact, I highly doubt that I would sell my shares unless they went well into the double digits... again, I can't stress enough that this is provided that the video lottery is legalized, based on the information that is out there about what the legislation will do. There are a million factors that can affect this to the positive, or, to the negative.

In respect to anything said by an executive of Nevada Gold, please heed this legalese from their website:

This interview may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We use words such as "anticipate," "believe," "expect," "future," "intend," "plan," and similar expressions to identify forward-looking statements. Forward-looking statements include, without limitation, our ability to increase income streams, to grow revenue and earnings, and to obtain additional gaming and other projects. These statements are only predictions and are subject to certain risks, uncertainties and assumptions, which are identified and described in the Company's public filings with the Securities and Exchange Commission.

Now, to the meat and bones of the article...

Here is a snip from my interview with Bob Sturges:
J: Let’s talk about slots in Washington. The legislation called for more than 7,500 slots to be authorized. How many of those do you think you all could... If it is legalized, which there’s a remote chance of, but how many of those do you think you could fit into your casinos, and what are the cannibalization effects that it will have on your existing business, and what about other operators coming in as a result of this legislation?

Sturges: OK. The number that was in the last bill of 7875, the way that they got to that number was to multiply at that time, the existing number of card rooms, which was 63- there are a couple of less right now, and take an average of 125 machines per location, that’s how they got to 7875 and it would allow up to 200 slots in any one location. We have- most of our properties either have the space, or the space could be readily added on without a major problem, in, I want to say- at least 7 of the 10 properties. So, in our thinking we are looking at immediately, with not too much of an effort, we can get to 1500 machines, under the old bill, if that were to happen. In terms of- we don’t see any cannibalization of our existing business. We really see an expansion of additional gaming opportunities where the table game business would still be there but you would supplement that with, you know, with a whole new product and frankly, stereotypically, attract a lot more women, who tend to favor slot machines. Men tend to favor table games; obviously, there are exceptions. Couples now come and both couples now have a gaming option. It would just, it would be a tremendous expansion of our product offering and a tremendous expansion of our business if this were to happen. I am always careful to say I couldn’t handicap it.

J: Right.

Sturges: Because, you know, it’s politics. Who knows? It could never happen. It could happen, in January. There is a special session in November, that has just been called by the governor to plug a $2 billion dollar budget gap- mostly through cuts. Then in January, as I understand it, they are going to be talking seriously about where there are revenue opportunities and the slots in the mini casinos is definitely going to be part of that conversation... Whether it gets across the finish line, who knows, but, it is definitely going to be part of the conversation.

J: OK. With the slots is there a feel for the amount of revenue that can be generated by said slots, and also, what kind of margins do slot machines generally have? I remember in a radio interview, where you talked about kind of the logistics of slots and whatnot, but, I was looking for a little bit more clarity on that, if it was at all possible.

Sturges: Well, you know, it’s very market specific in terms of what kind of margins you can expect. It depends upon so many factors and that's why I would not want to speculate in Washington, because we don’t know what they tax structure is going to be. We proposed 35%, but we don’t know where that winds up and hopefully, it wouldn’t be any larger than that, because that’s the point where it makes business sense. Once you start getting above that, it becomes problematic. What are the restrictions on promotional activities? What’s your competitive set going to look like? But in terms of win per unit, with only 7,800 slot machines in Washington, being such a huge market, I think it’s safe to say that you should be in the $200 to $300 dollar win per unit range. So, you can kind of do the math based upon the win per unit in terms of a top line. And then margin wise, obviously, slots are far more efficient than table games. But again, there’s so many factors I don’t know that will be in place in Washington that I wouldn’t want to speculate. But I can tell you, the 20-30% margin that we run between sometimes with our table games in our WA 1 properties should be easily achievable with slots.

In a follow up email, I asked:
In the event that slots are legalized, how much additional expense do you see coming from them (replacement of units, maintenance, administrative, ect)

To which, Sturges responded:
As far as the operating margins, I would only say at this point that they should be superior to the Washington I margins which have been in the 20% range. This assumes no more than a 35% tax rate on slot revenue. On the capital side, we don't know whether it will be our responsibility to buy the equipment or if the lottery officials will front that expense as is the case in some states. The replacement cycle varies from 5-7 or 8 years depending on a lot of factors. One machine with all the bells and whistles including signage would cost close to $20k.

Since Bob didn't want to speculate, I will... First, let's take a look at and analyze the legislation and then take a look at the effects that the potential legislation will have on Nevada Gold (I suggest that read the article I just linked to).

The Political Battle...

Lets take a look at just what the legislation would do (here is the full text of the bill). Since gaming is already legal in the state, all that the proposed legislation would do, is let places where you can already go and blow your money by playing cards give you another way to lose money. Instead of having face to face contact with a card dealer and other players, you simply press a few buttons after putting money in a machine, and over time, the machine will give you less back... Basically, these things are the "U-Scans" of the gaming world and only make a digital for of what people can already buy on their way home from work, at their local gas station.

The beauty of this legislation is that it isn't really an expansion of gaming in the traditional sense. The machines are only going to be allowed in places where people already go to gamble. Legalizing ESTGs in non-tribal areas should be more popular than closing down monuments, cutting support for the elderly/disabled, those that can't afford basic necessities such as food, or even police salaries, which have historically been the arguments used in the past to push through legislation of this nature. Furthermore, the big issue here, according to Representative Charles Taylor, is that at present, Native American Tribes have a monopoly on video lottery terminals, which, in his mind, is an unfair advantage over other businesses, that the state isn't actually able to give.

Furthermore, when looking at the specifics of the legislation, the revenues that it generates would help out kids: ~50% of the taxes raised from the proposed legislation would go to funding K-12 education, another ~30% to "the most vulnerable" or, more specifically, Health and Human Services, and the remaining ~20% to Public Safety (here is the announcement from the legislature). Other allocations will be for those needing gambling treatment and for administrative costs. How can any reasonable person with any semblance of a heart dislike that?

Keep in mind, these machines are already all over the state, but, they just sit inside of casinos that sit on various Indian Reservations. While talking about the reservations, how will this affect the various tribes? Some reports say that they will experience a ~9% decrease in revenues, but, it is apparent that even a loss such as that will hardly destroy their operations- everywhere else in the state, there is generally at least a 10% tax on gaming revenue (which tribal gaming operations don't pay), so, at worst, they should still be doing better than their counterparts throughout the state. When talking with Representative Taylor, he didn't seem to buy the argument that the various tribes would be dramatically affected. He said that most all of the tribal locations were destination spots complete with hotels, whereas, the card rooms are generally locals only, where many of the patrons can stop by on their way home from work.

When looking to let card rooms have these units, it would certainly do a lot to spur growth in the Washington economy. Nevada Gold, not to mention many other card rooms, would need to alter their present locations or even expand their buildings to accomodate the new machines, which would generate investment from outside of the state. It would help out regional banks looking to make construction loans, it would employ a host of contractors... the very contractors who have been slaughtered by the downturn in the housing market and the broader economy. In a day in which people need work, this legislation would provide it and do so in a manner that doesn't spend money the state doesn't have or raise the mandatory tax burden on anybody by a single cent.

The bottom line is this: it makes a whole Hell of a lot of sense for the state to pass the bill, as it is a way of not only containing slot machines to buildings where gaming is already allowed, but, is also an activity that people actively engage in, but due to where they do it at, doesn't contribute to the tax coffers of the state. By industry estimates, slots could generate $160 million in revenue for the state. As if this wasn't enough, it will spur economic activity through out the state!

Clearly, legalizing slot machines in Washington is not only the ethical thing to do, but, it also is one that puts people to work, and would decrease the budget shortfall by as much as 15%!

Now, to the potential effects for UWN:

If we take a look at this table, under an average scenario (the one highlighted in green) being 1500 slots, generating $250 in wins per unit (which, I feel comfortable with, based on the numbers from other states, such as Pennsylvania, and even Las Vegas, where the market is extremely competitive, driving down WPU and by extension, margins), we will see an additional $136.88 MILLION in revenue for the company. Slap a 25% EBITDA margin on that (which is the middle of the margins for table games at the Washington 1 properties) and you get over $35 million in what I will loosely refer to as "profit". Take out 20% of that for various cash expenses like interest, non-cash charges such as depreciation (which, essentially gives the company a float), and another 40% for income taxes (a guesstimation, based on other casino operators), and you end up with ~$17 million (or, ~$1.29/share) in what I will loosely call "earnings".

Now, this is a pretty big deal for a company that is trading for under $25 million, or ~$1.90/share...

Put another way, if you value the present company at nothing... Then slap a 10x multiple on the potential earnings of my average scenario from slots, the company shoots from $25 million in market capitalization to $170 million in market capitalization, or, up nearly 700%. Again, this values the present company, which is doing a stellar job operationally (and is growing by leaps and bounds), in formerly hyper inflated Zimbabwe Dollars...

If the scenario that I lay out in regard to earnings from slots is something that Mr. Market believes is feasible, then, he is implicitly putting a very slim chance on the legislation passing. From what I can gather from various readings, talks with legislators in the state, and a look at the Washington budget, I think it should be closer to a coin flip (that's even what one of the legislators said). It is believed that there are the votes to pass the bill, even. It just needs to get to the floor for a vote. To get an idea of how the populous could feel about it, in 2004, for example, a move to legalize slots barely missed the mark. The initiative was not only a lot more liberal than the one that is presently being proposed, but, was also during a time when deficits were not the issue that they are now, which should make the legalization much more probable.

What about other operators coming into the state and stealing a piece of the ESTG pie? This is something that I am not worried about, as, the legislation caps the number of video terminals at 7,875... With that kind of cap, it essentially gives present operators control of the market. Then, on top of that, it puts a drag on further expansion of card rooms, as, if new locations can't get video slot terminals, it limits their product offering. Making them significantly less competitive and less likely to destroy the margins that present operators enjoy. Culturally, with the implied limit of card rooms, you actually keep gaming from expanding, and destroying the ethos of the state, as many worry about (the link is a document download).

In regard to the expense of actually installing and buying slots, even if the state doesn't front the money for the machines, as has occurred elsewhere and the company must buy the machines for as much as $20,000 dollars a piece, I am not concerned. The company's newly filed S-3 could be a way to get quick funds. The company could borrow from Wells Fargo, which has apparently expressed interest in a long term relationship with the company. Certainly, if the company believes it can produce numbers that are anything close to that which I think are possible, people would likely line up to give the company money in the form of debt If the company would have some sort of a rights offering, even, I would be far from upset. This kind of offering is something that would take money from outside of the state, and put it directly into Washington. I for one, would be likely be willing to invest- which would take money out of my local economy (where I have been buying limited amounts of real estate) and sending it off to help people in Washington.

If Nevada Gold doesn't want to go the dilution route, there is always the options of leasing the slot machines from various vendors. Sure, it would reduce the amount that the company would earn, but, not by so much that a huge upside wouldn't be left for the stock; again, looking at the table from earlier, under the most conservative scenario that I can imagine; being 1,250 units, with a WPU that is like those in the over saturated Las Vegas market, and an EBITDA margin that is 75% of that at the Washington 1 properties (~15%), the company's revenue will more than double (going up in excess of $68 million dollars)...

From where I sit, my investment in Nevada Gold was an investment with a margin of safety before I knew the extent to which slots could help the company... Now, it is an investment with a margin of safety that also has one of the nicest looking call options that I could imagine, which is essentially being given to me for free. While I would never invest in a company solely on the hope the actions of a legislature that sits over 2,000 miles from where I reside, it is certainly a nice bonus.

Disclosure/Disclaimer: I own shares of UWN. This is not advice or a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about. While I try to get everything correct, I am human, and may have botched something up.

Sunday, October 2, 2011

Interview of Bob Sturges, CEO of Nevada Gold.

A week or so ago, I was fortunate enough to have the opportunity to interview one of the most talented gaming executives that you will come across: Robert (Bob) Sturges of Nevada Gold. The following post contains a mix of the interview and my commentary. As my commentary is interjected with snips from the interview, I may well have made some inferences that I should not have or are inaccurate. If you are wanting something that has little to no bias, check out my recording of the interview which does have a few edits due to problems with my software and to help the overall flow of the interview... from me to you, for your listening pleasure. :)

I'll go ahead and tell you that I have purposely omitted our discussion of the pending legislation regarding the legalization of the video lottery in Washington state (video lottery, loosely meaning slot machines in non-tribal casinos). The reason being, I am working on another post that specifically adresses the subject. It is such a huge topic, with such vast repercussions for the company (potentially, well more than doubling their revenue) that I feel it is best to split apart from rest of the interview.

As always, here is the legal mumbo jumbo that I more or less lifted from the company's website:

This interview may contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We use words such as "anticipate," "believe," "expect," "future," "intend," "plan," and similar expressions to identify forward-looking statements. Forward-looking statements include, without limitation, our ability to increase income streams, to grow revenue and earnings, and to obtain additional gaming and other projects. These statements are only predictions and are subject to certain risks, uncertainties and assumptions, which are identified and described in the Company's public filings with the Securities and Exchange Commission.

Now, on to the interview...

The first thing that I asked of Bob, was for him to tell us a little bit about his background. This is something that I have previously addressed in other posts. Honestly, the more that I hear about him, the more that I am impressed. Sturges, originally a young lawyer, became the chief prosecutor of organized crime in New Jersey. After working his way through the gaming regulatory agency in New Jersey, he left and began working as both a lawyer and a consultant in the gaming industry, saying that "The actual practice of law was really not anywhere near as interesting to me as the business world". During this time, he attracted the attention of none other than Ted Arison (the founder of Carnival Cruise Lines), who was Bob's business mentor and came to refer to Sturges as his "right hand man".

Additionally, he spoke of previous experience with a $30 million dollar EBITDA riverboat project, as well as a "million dollar a day casino, up in the Toronto market". This is something that is always nice to hear that the CEO of a small but growing gaming company has experience with. Once Carnival sold off assets to Penn National Gaming, he was slated to be the Chief Operating Officer of the acquiring company, but parted ways, largely due to his family being located in Southern Florida. Through his consulting work, he eventually came to cross paths with Nevada Gold. After the board asked him to be the CEO of the company, he then tapped Jim Kohn from knowing him through Carnival to come in as CFO. At the time that his newly assembled team came in, it was no stretch to say that the company was in shambles; the team had to do a ton of work to make the company stop bleeding money. After paying off their previously thought insurmountable amount of debt, they had hoped to use the capital markets to borrow money to grow a great business. Then, came The Great Recession, as a result, they needed to be a lot more creative in their purchasing; largely, this has involved the use of seller's paper, rather than traditional lending from various banks.

After the introduction and talking about the various members of the management team, who when combined, have experience in well over 20 gaming jurisdictions, I asked a question that was give to me by a reader, which is also coincidentally one of my favorite's that Phil Fisher would ask: "What other operators do you admire?" After careful reflection, Sturges mentioned Steve Wynn and Ted Arison. He first talked of billionaire Steve Wynn, referring to the tight ship that he has historically run, as well at as his "tremendous track record". When listing various qualities (of operators in general), mentioned items such as the attention to detail and focus on the bottom line, saying, it " something I learned from Ted Arison, who was really a master in that regard... He was an incredibly successful businessman, and that's something I have tried to implement here, and always followed as a philosophy. Let's put ego aside, let's not do stuff to make ourselves feel good or because we make emotional decisions, but, because we see it really building our bottom line."

Struges also noted that he liked to see stability in the staff of an organization. He is a person who considers himself to be nurturing, yet serious- not very "Hell-raising" in regard to his managing style. I then asked his intent with the company (in terms of his working time horizon), to which he gave me the impression of being in for the long haul. Specifically saying it would likely be his last job, that he had a 5-7 year time horizon, and that he wanted to see the company become a big player- all the while implying that his holding of stock and options are a huge incentive for him to do good things with the company.

Who knows? He's by no measure an old executive and at the ripe young age of 63, may well have more than just 5-7 years at Nevada Gold. Obviously, with the newly filed S-3, he is incentivized by these very options to not do anything stupid, such as blow company resources on an overpriced acquisition. He later characterized the S-3 as "a weapon in our arsenal, that for the right opportunities, for this to be waiting on the shelf... it's something that we've got 3 years to decide what to do with it, and we just thought that it would be a good weapon to have, without any preconceived notions about when, where, and how it's used." These, plus the rest of what he said about the registration, should put weary shareholders to rest about the ill-effects of any potential dilution.

The new credit line with Wells Fargo is going to be entered into, giving the company breathing room with the due date of their debt, despite being at roughly the same interest rate. The real kicker here, is that Wells Fargo has expressed an interest in a long term relationship, especially for the right deal, as they like what the company has done and is comfortable with the management team. While the deal has yet to close, an announcement will be made with the terms. Given that the company was shopping the deal around to several banks (per various conference calls), it is likely that the held out for the best deal and implied banking relationship. It isn't like Wells Fargo is a stranger to lending to gaming operations.

When I asked Sturges about the status of the Las Vegas Motor Speedway project, it came out that the new owners of the property, Rialto, are indeed the guys with strong ties to home builder Lennar. Despite Whitney Tilson being bearish on home builders (and, I would presume developers of virtually anything), I view this as a net positive for the development, as they have a lot of experience with property development. Just because the outlook is bearish on a price to value ratio with one (well, actually, numerous) fund managers, doesn't mean that the people that are involved in the development of properties dont' know how to develop; which, in my mind, is all that matters in this scenario with Nevada Gold. If there is anything that we can learn about Rialto, it's that they actually do know how to get stuff done.

While the previous contract for the project is with the previous owners, and, more or less done with, it does seem that the prospects for the development are getting juicier for Nevada Gold. In this press release, the company noted that it is attempting to negotiate a greater equity stake and management contract. Sturges made sure to say that the company is willing to take on minority stakes where they can also get a management contract in order "to control our own destiny", with no interest in simply buying a minority stake and not being able to ensure that operations run smoothly (and profitably).

Additionally, I questioned him about the ~$250K in the company's latest 10Q that were allocated to "Capitalized Development Costs". While Sturges wasn't readily able to answer the question and readily admitted it, rather than bumbling around about it; which, to be fair, is a question that is much more suited for the CFO the company. He emailed me the response of "The 250k is comprised of expenses associated with the Las Vegas Speedway project and licensing expenses in Nevada and a few other minor expenses." I view this as a net positive, as the company has more or less tapped out the total amount that they were contractually bound to spend under the old contract. This spent money may give UWN a degree of leverage that they can use in the new negotiations. After all, if they have spent money on things for the project, why would the new owners want to re-spend the money on the same thing? While I don't know exactly what the money was spent on, I would imagine that there was a certain amount of time dedicated to the items that the money was spent on. If this holds true, I would also imagine that Rialto would like to have a quicker process for the development. Nevada Gold has no learning curve whatsoever for this project, which any other company coming into the project would have.

Moving along, I asked about the process for getting a gaming license in the state of Nevada. Sturges estimated that the company is "well past the 1/2 way mark". Basically, this means that around the beginning of 2012, they should have a license. In this vein, the company is still actively looking for deals "where we can exert operating leverage" and more specifically, due to capital constraints, they seem to feel comfortable making an acquisition in the $10-$15 million dollar EBITDA range.

One thing that I found of interest was the company's imagination for uses of the land in Colorado, located off of the Central City Parkway. While presently in an appraisal process (for mineral rights and such), the company had the thought of potentially using it for a golf course. Sturges pointed out that the carry on the property was only $20K, so, they are waiting for the right opportunity to dispose of it. Regardless, from talks I have had with a person in the area, it is apparently a really pretty parcel of land. Don't believe me? Travel the whole thing via Street View on Google Maps.

Moving along to Washington, Bob had actually just returned to Texas from a trip to the properties in Washington state. We talked about the sorts of things that he goes through on his regular trips to the Pacific Northwest, which occur "at least once a month". Items such as day long roundtable discussions with the general managers of the properties and various company executives, visits to the gaming sites, and updates as to the politics going on in Washington occupied the bulk of his 3 day visit. He mentioned that the company continually does hospitality training (they are doing a refresher course after having one just a year ago) - Sturges saying "I'm not a believer that training is a one shot deal... that you do once a decade or once every 5 years. It's gotta be a constant process to remind everybody- top of mind awareness, that we are in the hospitality business."

As previously mentioned, he visited every property in the eastern part of the state (which make up the vast majority of the company's card rooms) to personally verify that the properties are preforming and looking as they should be, and to also get a feel for the customer experience.

One of the items that I had previously suspected, but finally got the chance to verify, was that the company doesn't have to put a whole lot of money back into the properties. In fact, despite giving a face lift to 2 of the properties (Mill Creek and Seatac) to get rid of what Sturges described as a "half baked tropical theme, that used to be in there from the old days", the company only allocated a $250K budget for the properties for the year. This is a big deal, as it certainly sheds light on the future cap ex expectations that the company will need... "They're not very capital intensive" according to Sturges. If you look at the recent depreciation and amortization expenses for the past few quarters, a lot of it comes from things such as customer lists, and is in excess of $425K for just the last quarter, after taking out $62.5K (1/4 of $250K in yearly cap ex, also deducting some stuff like the capitalized development costs)... Furthermore, when asking about the accounting for such maintenance, Sturges said that it was a combination between repair and cap-ex... so, in my mind, an even greater amount of the cap-ex on the balance sheet can come through to the owners of the company company, as some was of the maintenance was already expensed.

While the EBITDA margins of the Washington 1 casinos are ~20%, he does not believe that the Washington 2 properties will be able to get up to the same margins due to geographical differences in the properties- the Washington 1 properties, mainly being in the west, less densely populated part of the state, have a different set of economics. However, he does seem to believe that the Washington 2 properties have a lot of room left to run, with a goal of 75% of the EBITDA margins that Washington 1 presently operates at... or, roughly 15% EBITDA margins, which, still leaves a lot of room for operational improvement.

After talking about margins, we moved on to the financial performance of other card rooms in the state. Sturges noted that there is at present, a great deal of financial distress in the card rooms of the state, and as a result there could be more buying opportunities. While more than receptive to expanding in Washington, especially since the company presently has great infrastructure for taking on a greater role in gaming market of the state, he noted that "We keep our eyes open for sure... to buy something at what we call 'a reasonable multiple'... the only caveat I have in my own mind is, becoming a totally Washington based gaming company. We really would like to keep some level of geographic diversity and not put all of our eggs in that basket." He mentioned that 3-5x EBITDA "seems reasonable", though, there could be exceptions.

And, pretty much, that's it... other than the talk of slots, which, as I have already mentioned, deserves it's own post. So, come back in a few days (or, just add me to your reader program of choice via RSS) to read about it. The coming post is ~90% finished, I just have to do a touch more research and number crunching.

I am sure that it comes as no surprise from this, and my previous postings, that UWN is my favorite stock at the moment. They have a really bright future that I believe I have not paid a single cent for. I believe that due to a lack of understanding about a host of things (management, acquisition criteria, income vs. cash flow, certainty of contracts, debt issues, and others) in regard to the company, Mr. Market has been perpetually discounting the security. For me, it is amazing that the company can borrow money at interest rates that are solidly in the double digits, and still cash flow like crazy- which, not only shows how selective they are in acquisitions, but also how good of operators they are.

While a lack of coverage is frustrating for the company (after all, it was mentioned by Bob), I find comfort in the fact that the stock is almost totally uncovered in the press, the blogosphere, and even in message boards. Generally, it seems that my best ideas have been small, uncovered, and unloved. Until suddenly, they weren't.

Disclosure: I am long shares of UWN. This is not advice or a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.