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Monarch (NASDAQ:MCRI) Beats Q4 Sales Targets


Full Report / February 14, 2024

Luxury casino and resort operator Monarch (NASDAQ:MCRI) reported Q4 FY2023 results topping analysts' expectations, with revenue up 6.3% year on year to $128.2 million. It made a GAAP profit of $0.93 per share, down from its profit of $1.14 per share in the same quarter last year.

Monarch (MCRI) Q4 FY2023 Highlights:

  • Revenue: $128.2 million vs analyst estimates of $118.5 million (8.2% beat)
  • EPS: $0.93 vs analyst expectations of $1.02 (8.9% miss)
  • Gross Margin (GAAP): 53.9%, in line with the same quarter last year
  • Market Capitalization: $1.31 billion

Established in 1993, Monarch (NASDAQ:MCRI) operates luxury casinos and resorts, offering high-end gaming, dining, and hospitality experiences.

Monarch began its journey with the Atlantis Casino Resort Spa in Reno, Nevada. It aimed to deliver a high-quality gaming and hospitality experience, focusing on the luxury resort market. The company's destinations provide an extensive range of amenities and services beyond traditional gaming.

Monarch's properties feature modern casino gaming facilities, deluxe hotel accommodations, fine dining, spa services, and entertainment. Its resorts target both gaming enthusiasts and guests seeking a premium leisure experience.

Revenue for Monarch is primarily derived from its diverse offerings, including casino operations, hotel services, and dining and entertainment amenities. The company prioritizes luxury, quality, and complete service, appealing to customers seeking an encompassing resort experience.

Casinos and Gaming

Casino and gaming companies that offer slot machines, Texas Hold ‘Em, Blackjack and the like can enjoy limited competition because gambling is a highly regulated industry. These companies can also enjoy healthy margins and profits-have you ever heard the phrase ‘the house always wins’? Regulation cuts both ways, however, and casino and gaming companies may face stroke-of-the-pen risk that suddenly limits what they do or where they can do it. Furthermore, digitization is changing the game, pun intended. Whether it’s online poker or sports betting on your smartphone, innovation is forcing casino and gaming companies to adapt to keep up with changing consumer preferences such as being able to wager anywhere on demand.

Competitors in the casino and resort industry include Boyd Gaming (NYSE:BYD), Red Rock Resorts (NASDAQ:RRR), and Golden Entertainment (NASDAQ:GDEN).

Sales Growth

Examining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Monarch's annualized revenue growth rate of 15.8% over the last five years was solid for a consumer discretionary business.

Monarch Total Revenue

Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Monarch's recent history shows its momentum has slowed, as its annualized revenue growth of 12.6% over the last two years is below its five-year trend.

This quarter, Monarch reported solid year-on-year revenue growth of 6.3%, and its $128.2 million of revenue outperformed Wall Street's estimates by 8.2%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Monarch has been a well-oiled machine over the last two years. It's demonstrated elite profitability for a consumer discretionary business, boasting an average operating margin of 22.5%. Monarch Operating Margin (GAAP)

This quarter, Monarch generated an operating profit margin of 19.8%, down 3.5 percentage points year on year.

Over the next 12 months, Wall Street expects Monarch to maintain its LTM operating margin of 22%.

EPS

We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable. Monarch EPS (GAAP)

Over the last five years, Monarch's EPS grew 123%, translating into a solid 17.4% compounded annual growth rate. This performance is higher than its 15.8% annualized revenue growth over the same period. Let's dig into why.

While we mentioned earlier that Monarch's operating margin declined this quarter, a five-year view shows its margin has expanded 4.6 percentage points, leading to higher profitability and earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q4, Monarch reported EPS at $0.93, down from $1.14 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects Monarch to grow its earnings. Analysts are projecting its LTM EPS of $4.20 to climb by 5.8% to $4.44.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Although Monarch has shown solid business quality lately, it historically did a subpar job investing in profitable business initiatives. Its five-year average return on invested capital was 13.5%, somewhat low compared to the best consumer discretionary companies that pump out 25%+.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Monarch's ROIC averaged a 14.2 percentage point increase each year. The company's rising ROIC is a good sign and could suggest its competitive advantage or profitable business opportunities are expanding.

Key Takeaways from Monarch's Q4 Results

We were impressed by how significantly Monarch blew past analysts' revenue expectations this quarter, driven by outperformance in its casino and food and beverage operations. That stood out as a positive in these results. On the other hand, its EPS missed estimates. 

The company also announced a quarterly cash dividend of $0.30 per share, payable on March 15 to shareholders as of March 1.

Overall, this was a mediocre quarter for Monarch. The stock is flat after reporting and currently trades at $69.04 per share.

Is Now The Time?

When considering an investment in Monarch, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We think Monarch is a solid business. First off, its revenue growth has been good over the last five years. And while its projected EPS for the next year is lacking, its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits. On top of that, its rising ROIC shows management is finding profitable business opportunities.

Monarch's price-to-earnings ratio based on the next 12 months is 15.2x. There are definitely things to like about Monarch, and looking at the consumer discretionary landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $72.25 per share right before these results (compared to the current share price of $69.04), implying they saw upside in buying Monarch in the short term.

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