Description

Overview  

Four Corners Inc. is the largest bingo and charitable gaming supply distributor in Texas.  The business is profitable, generates substantial cash, and needs very little invested capital.  Because of this, Four Corners pays out nearly all of its FCF via quarterly dividends, currently yielding nearly 11%.  Despite paying out all of its earnings, Four Corners has grown revenues and EBIT by 27.5% and 158% respectively since 2017, demonstrating strong operating leverage and business execution.  Meanwhile, the valuation has disconnected from the financials, with shares trading at only 7x earnings ex-cash and an 11% dividend yield.  Given the business strength and trajectory since 2017, I believe shares present an attractive risk/reward opportunity.  If shares re-rated to a 7% yield, which is likely conservative, the stock has a near-term upside of 50%+.

At first glance, investors may worry about legalization of online gambling or sports betting impacting their charitable bingo business, but that risk is likely years away.  The Texas legislature is not in session for the remainder of 2022. Even though the casino behemoth Las Vegas Sands spent $10M+ on lobbying and statewide ad campaigns in support of casino legalization last year, they gained very little traction. I also believe the target demographic for charitable bingo is different from online gambling or sports betting.  Even in the event of legalization, I would expect any negative impact on charitable bingo to be modest.

So why does this opportunity exist?  Prior to the new SEC rules on dark stocks (SEC rule 15c2-11), Four Corners only distributed its financials to shareholders via an email list, greatly limiting visibility for prospective investors.  In response to the new SEC rule and to maintain liquidity in their stock, which is roughly 70% owned by employees and insiders, management decided to begin reporting through the OTC Pink Tier in August of last year.  Due to this dynamic, I believe the company is largely unknown to investors. 

Four Corners is a market-leading, stable, growing cash-cow with a high payout ratio in a profitable niche.  As more investors come across Four Corners’ financial progress and business strength over the past five years, I believe shares will trade closer to a more reasonable valuation of 8-10x EV/EBIT or 7-8% Div. Yield. 

Key Characteristics

• Capital-light business model generating strong FCF while paying out >90%

• Largest Revenue Stream growing at 16% CAGR since 2018

• Expanding EBIT margins from 9.2% in FY17 to 18.7% in FY21

• Valued at only 7x P/E ex-cash, yielding 11%

Business

Four Corners Inc. through its subsidiary K+B Sales, Inc. and d.b.a., Good-Time Action Games, is a distributor of bingo supplies such as bingo paper, ink daubers, pull tabs, and electronic bingo minding systems.  Due to the state-by-state nature of gambling regulations, Four Corners currently only operates in Texas and substantially all of its customers are Texas charities.  Four Corners is the largest bingo supply distributor in Texas and has the largest selection of pull tabs, bingo products, equipment, etc.

Four Corners has been serving the Texas charitable bingo market for over 40 years and has long standing customer relationships with many of Texas’ largest charities and is a key partner in helping them raise funds through bingo and pull tab games.

Financials

Four Corners has a very strong balance sheet with a current ratio over 3, $2.3M of cash, and no debt.  The income statement is simple as well, with all revenues coming from their pull tab and bingo products, generating gross margins of 45-50% and a relatively fixed SG&A base.  Because of this structure as a distributor, any additional product sales through their existing customer relationships, e.g., more pull tab sales, quickly drop to the bottom line as evidenced by EBIT growing over 150% since FY17 with a much more modest 27.5% growth in revenue.

 Unsurprisingly, the first half of 2020 was negatively impacted by the pandemic as restrictions on events and gatherings forced many charitable bingo halls to close.  The business bounced back very quickly though in 2H20 likely due to a combination of stimulus payments as well as pent-up demand, which, importantly, has been maintained through FY21.

When breaking down revenue streams, it quickly becomes clear pull tab revenue has been the driving force behind revenue growth over the past 4 years, growing at ~16% CAGR even when including 2020.  While also growing up until 2019, equipment rentals and supply revenues are more of a steady, flat revenue stream. After dropping the most during COVID, equipment rental revenue is just now reaching the ~$7M annual run-rate it was at pre-Covid.  Strong growth in their largest revenue category, pull tabs, matches up with their stated focus on providing the widest range and most up-to-date inventory of pull tabs.

Legal History

Over 15 years ago, the company’s former subsidiary, Aces Wired, was involved in a legal battle with the Texas Attorney General over its “Amusement With Prize” electronic game machines, which the company believed were legal.  This line of business was separate from it’s charitable bingo operations and the company ended up settling with the Texas AG by closing down this line of business, forfeiting assets related to the business (~$1M), and a few members of management pleading guilty to minor charges.  Gordon Graves, the founder, former board member, and then chairman, who was central to the scandal is no longer involved in management of the company.

I believe the company got too aggressive in looking for ways around Texas’ tight gambling regulations with their Aces Wired business, but weren’t trying to do anything outright nefarious.  I think the company learned their lesson and are fully focused on running the charitable bingo operations and put this misstep behind them.

Share Structure

Four Corners has 11,059,658 basic shares outstanding, or 11,101,389 diluted.  Insiders own nearly 70%, as the float is only about 3.4M shares.  While dividends may not be the most tax efficient means of allocating excess capital, it’s predictable and far better than hoarding/wasting it.  Due to the high dividend payout ratio and ~70% insider ownership, I believe management is aligned with shareholders and will likely continue returning nearly all FCF via dividends.

Summary

Four Corners is a growing market leader in a lucrative niche trading at only 7x earnings ex-cash with an 11% dividend yield.  They generate strong FCF, pay it all out via dividends, and have still been growing revenues at a decent clip due to the limited capital needs of their business.  The share price does not reflect the substantial top and bottom line growth over the past five years mainly due to limited distribution of financials.  Now that the company is reporting their financials publicly through OTC Markets, I believe shares will re-rate to a more reasonable valuation (8-10x EV/EBIT or 7% yield) as more investors discover this opportunity.

Risks

• Insiders own majority stake and could take advantage of minority SHs

• Financials are reviewed, not audited.  Company is on OTC Pink tier, so disclosures are more limited vs. higher tier OTC listings or SEC filers.

• Gambling is a highly regulated, state-specific industry and is therefore impacted by any changes in regulations

• This is a low-float micro-cap security with limited liquidity and is likely only suitable for individuals or small funds

Disclosure: My personal accounts and/or funds I manage may have long positions in FCNE common stock, which I/we may buy/sell at any time.

Catalyst

-More Investors becoming aware of the stock now that company has started filing with OTC Markets

-Continued execution of business, further FCF growth and dividend increases