PlayAGS stock is a Buy in Gaming, says Roth Capital

Roth Capital Partners delivered an update on Wednesday on PlayAGS (PlayAGS Stock Quote, Charts, News, Analysts, Financials NYSE:AGS) after the gaming company released its third quarter earnings this week. Roth analyst Edward Engel reiterated a “Buy” rating on the stock, saying the trend lines look good for AGS to keep its positive momentum going.

Las Vegas-based PlayAGS designs and supplies gaming products and services including electronic gaming machines (EGMs) to the Native American gaming market. The company reported its Q3 on Tuesday, where revenue climbed 16 per cent year-over-year to $78.3 million and adjusted EBITDA was up eight per cent to $34.5 million. (All figures in US dollars.)

“Our third quarter financial results further reflect the people, product and process-driven operating momentum building within our business. Given the encouraging initial customer response to the broader and more diverse new product lineup we recently unveiled at the Global Gaming Expo (G2E), I am even more excited about what lies ahead for our Company and its key stakeholders,” said President and CEO David Lopez in a press release.

The company said its global EGM sales topped 1,000 units over the quarter, which was the first time it hit that height since Q4 2019. EGM revenue per day (RPD) topped $30 for the sixth consecutive quarter. By segment, EGM sales were up 16 per cent to $71.6 million, Table Products was up 30 per cent to $4.0 million and Interactive Games rose by one per cent to $2.6 million.

Looking at the quarterly results, Engel said the Q3 amounted to AGS’ third EBITDA beat this year, with the $78.3 million topline coming in ahead of the consensus estimate at $75.8 million and the adjusted EBTIDA gain of $34.5 million also arriving ahead of the Street’s $33.0 million.

Engel said AGS is delivering better performance and stable costs, which bodes well for earnings growth in 2023. At the same time, the analyst pointed to a need for AGS to continue dealing with its debt before investors will see big gains in the company’s share price.

“AGS ended 3Q with net leverage of 4.0x and expects it below 4x by YE2022. The company has been reducing net leverage by 0.1x each quarter, and we expect a similar trajectory in 2023, which implies net leverage of ~3.5x by YE2023. Given AGS’s 6.5 per cent variable interest rate in 3Q, which is set to increase further in 4Q and potentially beyond, we believe deleveraging will be among the most important drivers to the stock,” Engel said.

With his “Buy” rating, Engel lowered his target price from $12.00 to $10.00, implying a one-year return of 44 per cent.