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Investors May Be Overpaying for Regional Gaming's Same-Store Sloth

Tickers in this article: BYD CZR ISLE MGM PENN PNK
By Brian Egger of

NEW YORK (TheStreet) -- The share prices of leading regional gaming outfits, like Boyd , Isle of Capri , Penn National and Pinnacle Entertainment , have risen 46% year-to-date, on average, nearly triple the S&P 500's gain during the same period.

In the wake of the sector's stock market winning streak, investors may want to consider folding: It's becoming more difficult to justify further expansion in casino stock valuation multiples.

On average, regional gaming equities currently change hands for roughly 8.6 times trailing 12-month EBITDA. That's not expensive from a historical perspective, but it's not cheap, either. Gaming stocks have, over time, traded in an enterprise value-to-EBITDA multiple range of 5-to-14 times.

To gauge the prospects for additional multiple expansion, we look to three potential sources of growth: acquisitions, same-store growth and new properties.

A few large corporate-level business combinations have been completed in the past year. With Boyd having consummated its buyout of Peninsula Gaming in November 2012, and Pinnacle having recently purchased Ameristar Casinos, there are fewer potential dance partners left for gaming suitors.

Without incremental growth from such acquisitions, casino operators may have to rely increasingly on same-store growth, as it were.

Same-store analytics disregard the contribution from new property openings or acquisitions. They focus instead on the rate of change in revenues generated by productive assets that have been in operation for at least a year.

Looking at those trends has been a pretty cheerless endeavor. During the first six months of 2013, legacy casinos in seven major Midwest and Southeast gaming markets generated aggregate revenues that were 6% to 7% below the revenues observed at those facilities during the first half of 2012.