Thursday, December 15, 2011

Looking Backwards At Nevada Gold's Forward Earnings...

I won't lie... On the face of things the financial results for Nevada Gold & Casinos (UWN) over the past quarter look pretty horrendous; especially when looking at the company's recent press release. However, once we take a look at the results a little bit deeper by diving into the 10Q, we quickly see that things are not that bad for the company. Despite being a huge contrarian, I actually believed management when they said on the conference call that they have "... positioned the company for long term success."

I will say that I will try to be brief and a lot of these statements are made as "all things equal statements". I realize that there will be nuances that can come out and change things a bit; this is meant to be kept simple. Every reader needs to think about the things that I say (and, to some extent things that I won't address due to brevity issues) and come to their own conclusion as to what they deem this company to be valued at and generating in terms of cash flow/owner earnings. This is after all, just a blog! :)

Lets first take a look at some the items that hit their income statement in the recent re-positioning of the company that likely don't reflect the future of the company:

First and foremost, the company had previously stated that it was impairing the value of a piece of land that it owns to the tune of $2,273,996 dollars... This is a non-cash expense and won't re-occur to this extent.

In the quarterly filing, they also noted that they lost $154,270 dollars on the extinguishment of their debt. Again, this has been expected, as the company previously announce that it had refinanced the bulk of it's debt load with Wells Fargo and that it had negotiated a new dew date with it's senior lender, this is expense is of no surprised. Given that their due dates are now in the fall of 2014 and the summer of 2015 let's throw these fees out, as they were part of the pre-payment penalty to Fortress (see section 2.7) and don't appear to be part of the newer Wells Fargo loan package. Furthermore, they amortized $33,336 of loan issuance costs due to the more than $800K they spent to get the Well's Fargo loan package. While this will be expensed for a while, it will be a non-cash charge, as the $800K has already been shelled out; don't get me wrong, it's a lot of money but it's a small price to pay for liquidity, breathing room, and better terms.

Next, let's take a look at the Colorado Grande which the company recently announced it was selling (for what I might add, is a VERY attractive multiple). The operation apparently lost $97,924 dollars during the last quarter. As these losses shouldn't be continuing this time next year (as long as the sale goes through) so, let's that part of the loss out as well. There was also a loss on the sale of assets for the amount of $22,340 dollars; again, likely an expense that doesn't reflect the future of UWN. In the sale of the Colorado Grande, the company will be getting approximately $36,000 per quarter (before amortization of the loan) in interest on the $2.4 million dollar note. Net cash inflows will actually be greater though, as the loan does have a decent degree of amortization to it.

Now, look at what they would have earned had these impairments not have been included. The company had a stated loss of $2,120,606, but when you add in just the one time impairments to income and losses from the Colorado Grande (which, the company only addressed one of in the press release and conference call) they would have generated cash of $427,924 dollars! If you use that as your run rate for the company (which, we can do for sometime, as they do have tax assets to offset future earnings) the company would have yearly inflows of $1,711,969 dollars. That, translated loosely as owner earnings gives the company a quite reasonable P/E of just a touch more than 10 (with a market cap barely above $17.3 million). That is a super simple calculation that is based on numbers for a quarter that isn't the best (but certainly, isn't the worst) in Washington. It also took place in a quarter that didn't give the company time to do much with operations at the newly acquired Red Dragon and they had a lower than expected hold percentage for the quarter (per the conference call). Additionally, they yet own AG Trucano. Once those items settle out, the earnings will likely look even better than I just highlighted.

Now, we can look at some other items. For example, the company doesn't need to invest much money in the card rooms it owns to keep them running well (per my interview with Bob Sturges), so, we can likely add back in a good deal of the company's not insignificant depreciation. The amortization expense of intangibles last year alone was well over $1 million dollars. In fact, for 2012, the amortization of intangibles (which consist of non-compete agreements, trade names, and "customer relationships" per page 45 of the 10K) is expected to be nearly $1.15 million! Any money used to service the items are already being expensed on the income statement as advertising (in the case of a trade name) or paying your workers to do their job (having good customer relationships), so, the amortization of intangibles is something that I feel comfortable adding back in to the income statement for owner earnings. There will likely be more depreciation and amortization to come from the acquisition in Deadwood... That all gets you to a Price/Owner Earnings that is has the strong likelihood of being in the single digits.

Presently, if financial results never improve (not just in operating efficiencies, but also in what the company believes to be a temporary low hold percentage), UWN doesn't get any management contracts (such as the development with Rialto), they don't get ELSTs in Washington state, they never acquire again and wait for the amortization to run out, and a host of other reasonably likely events don't come to fruition, the company is still not expensive by any means- in fact, I would argue that it is quite cheap.

If anything positive comes out for the company, I would figure that it would likely be viewed quite favorably, especially since there has been a lot of frustration expressed over the recent sale of stock. My back of the envelope analysis indicates to me that there is a ton of growth for this company that is being given away at present prices... It will certainly be interesting to see how the market reacts to this news. While I would hate to see my present holdings of the company go down in market value, I foam from the mouth in the hopes that the Mr. Market will give me the chance to buy more of the company at $1.00 per share.

In closing, I would like to make a few statements to management of the company. 1) The evening is a great time to have a conference call, please continue to have them after market close. 2) If you can give us a little more time to read (and mainly, digest) the 10Q, that would be awesome. :) 3) Your history of really breaking up the numbers in your financial statements is quite appreciated. Please continue to do so.

Disclosure/Disclaimer: I am long shares of Nevada Gold (UWN). I reserve the right to change any of my positions at any time. 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.


David said...

Looks like you're going to get your dollar! (Long UWN)

jeff said...

Haha! Yes, it does look that way!

David said...

Any implications?

jeff said...

I am not that worried. I don't think that this will hurt UWN that much. Even if it hits their revenues a bit, they are still cheap (at least, in my view). But, I could be wrong.

jeff said...

Furthermore, I want to point out, that in Washington, the Indians will do whatever they can to stop any expansion of gaming that doesn't help them. While that may stop ELSTs from getting in the card rooms, it does protect the card rooms from any assault from the internet.

Plus, any legislation that would give the state the ability to raise revenue through internet gaming, would need a 60% majority to pass (per the state constitution) so, it is an uphill battle.

David said...

I was thinking that this could be a net positive. If there is a general movement towards gambling as a means to shore up bankrupt state coffers, then surely that provides more of an impetus for the case to be made for the ESTG legislation.

David said...

Jeff, Don't you think that Nevada Gold just has a lot of debt. How do you get your head around it? I know it has been rescheduled to 2014/2015, but still.

jeff said...

To me, their cash flows, present and future, justify the debt.