Canadians: Steer Clear of This 1 Stock!

Great Canadian Gaming Corp is overvalued. Here is why you should avoid it in your TFSA or RRSP.

| More on:
Man considering whether to sell or buy

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Great Canadian (TSX:GC) is a gaming, entertainment and hospitality company that operates in Canada and the United States. The firm’s revenue comes from casinos, horse racing tracks, community gambling and hospitality.

The company reports a market capitalization of $2.43 billion with a 52-week low of $37.67 and a 52-week high of $56.32.

Intrinsic price

Based on my calculations using a discounted cash flow (DCF) valuation model, I determined that Great Canadian has an intrinsic value of $31.61 per share.

Assuming less than average industry growth, the intrinsic value would be $29.79 per share, and higher than average industry growth would result in an intrinsic value of $33.68 per share.

At the current share price of $43.00, I believe Great Canadian is significantly overvalued. Investors looking to add a hospitality and gaming company should avoid Great Canadian at current prices.

Interested investors should follow the stock through 2020 for an opportunity to buy shares for less than intrinsic value.

Great Canadian has an enterprise value of $2.4 billion, representing the theoretical price a buyer would pay for all of Great Canadian’s outstanding shares plus its debt.

One of the things to note about Great Canadian is its low leverage with debt at 20.5% of total capital versus equity, at 79.5% of total capital.

Financial highlights

For the nine months ended September 30, 2019, the company reports a strong balance sheet with retained earnings of $231 million, up from $145 million in 2018. This suggests the company has been reinvesting surpluses into itself — a good sign.

The company also reports cash of $310 million on $32 million of lease liabilities, which means it has more than enough cash to cover its short-term debt obligations.

This is a good sign for investors, as it means the company does not have to rely on its credit facilities for its current debt, thereby freeing up the facility to fund business growth.

Overall revenues for the period are up sharply from $848 million in 2018 to $998 million in 2019 (+18%). Even with increasing operating expenses, the company has managed to increase its bottom line to $233 million for the period up from $191 million in 2018.

From a cash flow perspective there are a couple of important things to note. First, the company repaid $135 million of credit facilities, which is offset by a $171-million draw on the facilities.

Second, the company spent $99 million on the repurchase of common shares. This is often done by senior management to indicate to investors that it believes the share price is undervalued.

Foolish takeaway

Investors looking to buy shares of a gaming and hospitality company should avoid Great Canadian for now. Although the company reports a solid balance sheet with strong retained earnings and a healthy cash balance, I believe the company is overvalued.

Using a discounted cash flow model (DCF) I determined the intrinsic value of Great Canadian to be $31.61, which is a materially less than the $43.00 at which it is currently trading at writing.

Looking at my model, the causes of this are a growing accounts receivable and capital expenditure accounts that are cash outflows.

This consumes cash and subsequently reduces the intrinsic value of Great Canadian.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned.

More on Investing

Target. Stand out from the crowd
Energy Stocks

3 Oversold TSX Stocks I’d Buy in Bulk

Recession fears impact oil prices, although three oversold stocks should remain resilient and generate substantial free funds flow throughout 2022.

Read more »

Stocks for Beginners

New Investors: 3 Top Dividend Stocks to Start a Simple Portfolio

These quality dividend stocks are worthy for new investors to consider for a simple passive-income portfolio.

Read more »

Dollar symbol and Canadian flag on keyboard
Tech Stocks

3 Top Canadian Growth Stocks to Buy in July

Here are three growth stocks you might want to add to your buy list in July.

Read more »

edit Four girl friends withdrawing money from credit card at ATM
Bank Stocks

CIBC Stock Could Be a Top TFSA Buy for a Rocky 2nd Half of 2022

CIBC (TSX:CM)(NYSE:CM) stock is a great dividend top pick to stash in a TFSA after the first-half market correction.

Read more »

exchange-traded funds
Dividend Stocks

2 Dividend ETFs With Significant Exposure to the TSX’s Top 2 Sectors

Two dividend ETFs offer ideal diversification because of their exposure to the TSX’s two strongest sectors.

Read more »

sale discount best price
Investing

RRSP Investors: Top Stock Pick on Sale After the Stock Market Correction

Quebecor (TSX:QBR.B) looks like a terrific dividend stock for RRSP investors to buy, as recession risks rise amid a market…

Read more »

edit Colleagues chat over ketchup chips
Investing

The Alternative Way to Look at Any Recession

Market down? Instead of losses, look for potential gains. This alternative way to look at any recession exposes a market…

Read more »

Arrow descending on a graph
Energy Stocks

Why Did Oil Stocks Crash so Suddenly?

Oil stocks like Cenovus Energy (TSX:CVE)(NYSE:CVE) crashed dramatically last week. Here's why.

Read more »