Owning Monarch Casino a Gamble
We maintain our Hold rating on shares of Monarch Casino & Resort (MCRI) following the release of disappointing first quarter results. We continue to believe that shares of MCRI hold significant long-term value. That said, in light of the challenging operating environment faced by the company, we do not expect significant near-term share price appreciation.
We believe that shares of Monarch are fairly valued at current levels, given the numerous challenges facing the company in the near-term. The company has a proven track record of delivering increasing revenues, earnings, and EBITDA from its Atlantis property.
We believe that the current expansion will enable the company to continue to take market share in the Reno area. In addition, the company has significant growth potential, either via new development on a vacant land parcel at its Atlantis property or via external development and acquisition outside the Reno market. We note that Monarch currently has $15.7 million in cash on the balance sheet, and zero debt, which give the company significant flexibility in financing any such growth.
Despite these positives, we expect the company to face a very challenging operating environment in 2008, as the company deals with a nearly perfect storm of issues including construction disruption related to the ongoing expansion, aggressive marketing and discounting by its closest competitor following the opening of a new hotel tower and casino expansion, increased general and administrative expenses including legal, payroll and benefits expenses, and weak economic conditions in the Reno area. We expect these issues to continue to negatively impact Monarch going forward. As such, we have substantially tempered our outlook.
Our $13.50 price target equates to a multiple of 14x projected 2008 EPS, plus cash on the balance sheet and our estimated value of the company's undeveloped real estate, and approximately 7x projected 2008 EBITDA, plus cash on the balance sheet and our estimated value of the company's undeveloped real estate.
Our projections take into account the expansion currently underway at the Atlantis property, but do not assume any additional developments or acquisitions. We note that as the year progresses, we may increase our forward estimates should conditions in the company's operating environment improve from the current challenging state.
Buy-Rated Plexus Well Positioned
Plexus Corp. (PLXS) has posted several quarters of strong results, with significantly higher than expected revenue and bookings. Although EPS has not been as strong, much of this is related to a higher tax rate. We believe that PLXS is among the best positioned in the industry and is poised to grow in the medical segment as well.
The company's outlook continues to be strong in spite of macro economic concerns, which have yet to affect its customers. We, therefore, maintain a Buy rating on the stock.
Plexus is currently trading at 13.9x our 2008 earnings estimate of $1.91 per share, a discount to its peer group. On a P/S basis, the stock is trading at 0.7x estimated 2008 revenue, still a discount to its peer group. We believe that over the long-term, PLXS is in the top tier of the EMS universe with the highest gross margin among its EMS peer group and above industry growth rates.
On April 23rd, Plexus announced results for the second quarter of fiscal 2008, ended March 29, 2008. Revenue for the quarter was $451.1 million, compared to $360.2 million in the year-ago quarter and our estimate of $450 million. EPS for the quarter was $0.48 compared to $0.23 in the year-ago period and our estimate of $0.51. EPS for the quarter included four cents in stock based compensation. Strong results in wireline, up 11.4% sequentially, and industrial/commercial, up 11.6%, offset slowing defense revenue, which was down 36.3% due to completion of a program.
During the quarter, Plexus repurchased 2.9 million shares under the accelerated repurchase program for a total of $100 million. PLXS expects to complete the accelerated repurchase program in the third fiscal quarter. Moreover, we believe that PLXS is better positioned in growth businesses, such as medical devices.
We, therefore, believe that the shares should trade at a premium to the peer group. We maintain our $34 price target, which we believe adequately reflects current macro-economic concerns, and represents a multiple of 17.8x estimated 2008 EPS.
Crown Castle Still Impresses
We maintain our Buy rating with a higher valuation target for Crown Castle (CCI), a leading operator of wireless communications towers in the USA and Australia, following its first quarter fiscal 2008 financial results, better than our estimates.
Overall performance has been driven by substantial demand for more tower space to facilitate high-speed data services, in particular 3G wireless and WiMax technologies. The acquisition of Global Signal has positioned the company as the largest tower operator in the U.S.A., providing better-than-expected cost synergies for the merged entity.
Although a substantial level of debt remains a concern, management has provided a financial outlook that its recurring cash flow per share is likely to increase by 25% during fiscal 2008. Our long-term view regarding the wireless tower industry continues to be positive and we believe the company is well positioned to capitalize on emerging telecom network deployment opportunities.
Since Crown Castle is currently losing money with regard to net income, the stock is difficult to value on the basis of its P/E ratio.
