February 17, 2016 - 11:00am EST by
2016 2017
Price: 15.75 EPS 0 0
Shares Out. (in M): 26 P/E 0 0
Market Cap (in $M): 414 P/FCF 6 0
Net Debt (in $M): 70 EBIT 0 0
TEV (in $M): 484 TEV/EBIT 0 0

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  • Small Cap
  • Carl Icahn
  • Gambling


Tropicana Entertainment (TPCA) is an unlevered group of regional casinos controlled by Carl Icahn offering investors a growing ~16% FCF yield.  It could likely pay a ~$9/share dividend (~60% of share price) from their gross cash without affecting this yield. 

The market has completely missed a substantial improvement in TPCA’s business, which was already cheap.  It is now extremely cheap and relatively defensive with low leverage and multiple strong properties.  

While the human propensity to gamble has remained significant, the market for regional casinos has been challenged as casinos were built in more locations.  Nowhere is this truer than in Atlantic City.  There has been substantial ink devoted to the multitude of problems faced by the city so I won’t rehash them here.  

Those problems have masked the shocking fact that Tropicana’s Atlantic City casino is growing and their online New Jersey business is growing fast (excluding Atlantic City’s contribution entirely the stock is still inexpensive).

So what changed?  The number of casinos in Atlantic City and specifically the effects of the Caesars bankruptcy.

There are currently eight casinos in Atlantic City.  Three belong to Caesars and are rapidly shedding patrons due to a lack of promotional spending in their very messy bankruptcy.  In January 2016, Bally’s, Caesars, and Harrah’s casino win decreased ~12%, ~13%, and ~10% respectively (similar story in the end of 2015). 

It seems unlikely those trends will reverse in Caesars current state and those three casinos make up ~35% of AC casino win. 

In January, Tropicana’s land casino win increased almost 6% YoY (more including their online business).

This was not a one month phenomenon.  For all of 2015 Tropicana’s land win increased 2% while their Internet gaming win increased a whopping 45% to ~$33m

This is a pretty large online casino for the US and is both a potential growth engine and a provider of substantial upside depending on how that hand plays out (pun intended). 

These developments are very substantial for the TPCA business but the market has basically not cared (or rather, not noticed).  The stock has been flat for years on mostly bad news and is now ignoring the very substantial operational improvement.

Below is the operating income for TPCA’s Atlantic City division:


The rest of the story in TPCA is substantially the same as a few years ago with the other properties ranging from extremely valuable local monopolies to junky slot houses. 

Of particular importance is their Evansville, IN property.  While they don’t break out the individual property economics, in 2013 this location did $35m in EBITDA on ~$120m in revenue with de minimis local competition. 

They also own a casino and Four Seasons hotel in St. Louis, MO.  This property was bought in 2013 for ~$260m but struggled to attain the desired improved profitability.  Nonetheless it remains a significant asset with strong upside potential and has recently begun exhibiting improvement, with admissions up 12% YoY in January.

Arguably these two assets are worth close to the enterprise value of ~$470m.  They also own five other casinos (including the attractive Laughlin, NV property with ~1500 rooms) in addition to Atlantic City.


Icahn has a history of buying distressed casinos and selling them later at nice gains.  That may or may not happen here.  Also in the cards (again – pun intended) would be a special dividend to improve the capital structure and provide IEP capital for other opportunities.  TPCA currently has almost ~$9/share of gross cash.

An acquisition is also possible, but that seems fine given (a) that it would be highly FCF/share accretive given their significant cash balance yields zilch and (b) Icahn seems to have a decent track record with casinos.  To put this in perspective, if Icahn deployed the cash at an 8% yield TPCA would have a FCF yield above 20% with modest leverage.  Of course, if TPCA just paid down borrowing with its cash it would also increase the FCF yield by a few points through reduced interest.  

In any case the capital allocation decisions are being made by someone smart who’ll sell if someone starts waving a big check in front of him.  

The stock is very cheap and gets cheaper as the cash pile grows.  Peers seem to trade around 8x EBITDA - this trades under 4x.  Additionally, TPCA still owns their property which may lend some additional optionality (GLPI trades at ~12x forward EBITDA).  It’s not difficult to think the stock could double in a few years (accrue cash and slight multiple expansion).  I’m happy to roll the dice here (no pun intended).


Have ownership interest in Tropicana at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Tropicana without notice for any reason at any time.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Cash flow

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