VICI - A Fundamental Valuation

🏠 Business Overview

🎯Key Metrics

Total: -1.5/17

• +2 ✅✅ Projected Operating Margin: 90%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 4.5%
• +0 ⚠️ Last 5-Year ROIC: 7.65%
• +1 ✅ Estimated Cost of Capital: 6.86% (lower than ROIC)
• -1 ❌ Last 5-Year Shares Outstanding CAGR: +14.77%
• -2 ❌❌ Projected 5-Year EPS CAGR: -0.61%
• +0 ⚠️ Projected 5-Year Dividend CAGR: +5.00%
• +0.5 ✅ Moody's Debt Rating: Baa3
• -2 ❌❌ Morningstar Moat: None
• +0 ⚠️ Morningstar Uncertainty: Medium

📈Business Valuation

Before presenting you the final valuation I will show you my assumptions, as well as the historical data and framework its based on.

Revenue Growth

Below is the last ~8-10 years of revenue growth for VICI.

I believe the present uncertainty and unrest on the United States and its immigration and tourism policies will penalize the growth of VICI during the next couple of years, being more pronounced on the next year, and tapering a little above the economy growth rate after that.

💡Given the historical data presented, my assumption is that the company will be able to growth its revenues ~3.5-4.5% during Year 1 and ~3.5-5.5% each year from Year 2-5.

Cost of Capital

I've used the latest quarterly and annual reports of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody's provided a rating for the company I used it as the debt rating.

Cost of Capital: 6.86%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I've used: Cost of Capital - The Fair Value Journal. It is and will ever be completely free :)

Also, keep in mind that the average cost of capital in the US for a company similar to VICI is ~5.32%.

💡My assumption for the cost of capital is that it would start at around its estimated value of 6.86% and gradually converge to the industry average 5.32%. Later, we will explore some variability over these values by using the Monte Carlo simulations.

Operating Margin

Below is mapped out the historical operating margin for the company:

💡My assumption is that the company would see its operating margin a little compressed into ~80-90% (Year 1) and graudally converge to its historical average of ~80-95% at the end.

Sales / Capital ratio (Reinvestment)

For a company like VICI, its sales to capital ratio would always be very low, because its a capital intensive business.

This is shown by its historical data over the last couple of years:

💡Nothing to see here, I'm assuming it will remain stable around the 0.09 mark.

Discounted Cash Flows (Weight: 60%)

I've used the latest annual and quarterly report and my assumptions explained above to complete my Discounted Cash Flow valuation:

Some notes on the inputs above:

• Terminal Revenue Growth - I'm using the risk-free rate (10-Yr bonds of the US), because long term the company should not grow more than the rate of the economy. I'm using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Initial and Terminal Tax Rate - Given the fact that its recent averages are around ~0.25% I'm assuming the same value for both.

All the other inputs were taken from the financial statements or from my assumptions.

The DCF gives us an estimated fair value of 50.48 dollars for VICI.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used my assumptions and the range explained on during those sections.

As you can see from the above VICI seems to be a little undervalued given that its current price of 26 dollars is below the median and a little above P20. From these simulations we can extrapolate that there's between ~50-80% probability of VICI being undervalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF - The Fair Value Journal

Dividend Discount Model - Variable (Weight: 30%)

Given the heavy focus of R.E.I.T.s in rewarding their shareholders with dividend payouts, resulting VICI paying around ~70% of its Free Cash Flow in dividends, we will value the company using a Dividend Discount Model (DDM), using a variable approach, given the ability the company still has of growing its dividends above economy growth rate.

Dividend Growth

VICI has been steadily increasing its dividends and below is shown the rate of that growth over the last couple of years:

💡My assumption for the dividend growth is that it would start a little above its historical median and economy growth rate: ~4.68-7% (with a higher focus on the lower end) and then gradually converge to the economy growth rate ~3.5-4.7% (with a focus on the higher end).

Note that I'm using the 10 Year U.S. bonds as a proxy for the economy growth rate.

Given this assumption and the fact that VICI has a Cost of Equity of 7.50% we can calculate its fair value using a DDM valuation method:

Now we can also explore the lower and upper end scenarios for each input by using the Monte Carlo simulations:

Using this valuation method we can extrapolate that VICI is undervalued given that its current price of 26 dollars is well below the P10. From this we can say that there's more than ~90% probability of VICI being undervalued.

EPS Growth (Weight: 10%)

Although a REIT is not a good candidate for this method, because its EPS is compressed by large non-cash depreciation charges on real estate assets that typically appreciate rather than lose value, I will still use it as a small sanity check.

For the EPS valuation, I designed three different scenarios, to be used later on the Monte Carlo simulation: a bad, a base and a good scenario. Everything about them is explained below.

Please note that the latest EPS for VICI is $2.64.

Also some relevant historical notes about the company:

Revenue Growth (CAGR)

Shares Outstanding (CAGR)

Net Profit Margin (Average)

P/E ratio (Average)

Knowing this, these were my three scenarios for the next 5 years:

Bad Scenario

• Revenue Growth (CAGR): 4.00%
• Net Profit Margin (Average): 65.00%
• Shares Outstanding (CAGR): +15.00%
• P/E ratio: 10
• EPS 5th Year: 1.47
• EPS CAGR: -11.06%

Base Scenario

• Revenue Growth (CAGR): 4.50%
• Net Profit Margin (Average): 70.00%
• Shares Outstanding (CAGR): +5.00%
• P/E ratio: 15
• EPS 5th Year: 2.56
• EPS CAGR: -0.61%

Good Scenario

• Revenue Growth (CAGR): 6.00%
• Net Profit Margin (Average): 80.00%
• Shares Outstanding (CAGR): +2.00%
• P/E ratio: 16
• EPS 5th Year: 3.63
• EPS CAGR: 6.58%

Given these assumptions and based on the historical data, I filled in and valued the company using the EPS Growth projections, discounted by the estimated cost of capital previously calculated and using the assumptions of the base scenario.

Then again, I used the Monte Carlo simulations to explore the possibilities on the lower (bad scenario) and on the higher (good scenario) end.

From this valuation, VICI looks fairly valued given that its current price of 26 dollars is around the median. We can extrapolate that there's ~50% probability of the company being undervalued or overvalued.

As before, feel free to try this yourself: EPS Growth - The Fair Value Journal

EPS Scenario Returns

We can also explore a little further the different scenarios by projecting in time the bad, the base and the good case scenarios.

Feel free to try this yourself: EPS Scenario Returns — The Fair Value Journal

✍️Summary

Now that we did all the heavy work, let's take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I would start adding again or initiating a position in VICI below the 31.40 dollars mark, because honestly the gambling business and the real estate around it is a mistery to me and overall very uncertain and very exposed to volatility and economy cycles.

Please, as always, remember that the fair value estimate has a 100% probability of being wrong and it will never be a precise number, even if it has decimals next to it 😮

Overall it seems VICI is undervalued at its current market price.

Fair Value: 41.86 dollars.