Business Overview and History: Accel Entertainment, Inc. (ACEL) is a leading distributed gaming operator in the United States, providing turnkey, full-service gaming solutions to bars, restaurants, convenience stores, truck stops, and fraternal and veteran establishments across the country. The company's focus on delivering unmatched customer support, guidance, and expertise has enabled its location partners to grow their businesses with incremental revenue.

Accel Entertainment was founded in 2012 and has since grown to become a dominant player in the distributed gaming market. The company started its operations in Illinois, quickly establishing a strong foothold in the state by offering a high-quality slot gaming experience at convenient local retail locations. Over the years, Accel has expanded its reach to additional states, leveraging its proven capabilities as a local gaming operator.

In 2022, Accel Entertainment made significant strides in its expansion efforts by acquiring local gaming operators in Montana, Nevada, and Nebraska. This strategic move allowed the company to diversify its geographic footprint beyond its core Illinois market. The Montana acquisition was particularly noteworthy as it included a gaming terminal manufacturing business, which produces proprietary gaming terminals and software for distribution in several states.

Throughout its history, Accel Entertainment has faced and overcome various legal challenges. In 2012, the company was involved in litigation with JJ Ventures Gaming, LLC over the validity of certain location agreements. This dispute was eventually resolved through rulings by the Illinois Gaming Board in Accel Entertainment's favor. More recently, in 2020, the Illinois Gaming Board filed a disciplinary complaint against Accel Entertainment alleging violations of gaming regulations. The company settled this matter in 2023, agreeing to pay a $1 million fine and implement additional compliance measures.

Despite these legal obstacles, Accel Entertainment has continued to grow its business and expand its footprint across the Midwest and Southeastern United States. The company's ability to navigate regulatory challenges while pursuing growth opportunities has been a key factor in its success.

One of Accel's key strengths is its collaborative and reliable partnerships with regulators across multiple jurisdictions. The company has navigated the complex regulatory landscape, enabling it to provide its services in 11 different regulatory structures. This strategic positioning has allowed Accel to capitalize on the growing trend of legalized local gaming across the United States.

Financials: Accel Entertainment has demonstrated robust financial performance, with a steady-state growth algorithm that promises continued success. In the latest fiscal year (2023), the company reported total revenue of $1.17 billion and net income of $45.6 million. Its operating cash flow for the year stood at $132.5 million, while free cash flow reached $50.8 million.

For the most recent quarter (Q3 2024), Accel reported revenue of $302.23 million, up 5.1% year-over-year. Net income for the quarter was $4.89 million, with operating cash flow of $50.05 million and free cash flow of $33.11 million. The revenue increase was primarily driven by higher net gaming revenue of $15.80 million, reflecting an increase in gaming locations and terminals. However, manufacturing revenue decreased $1.63 million or 48.9% due to lower equipment sales.

Accel's primary source of revenue is its net gaming revenue, which represents the net cash received from gaming activities. For the three and nine months ended September 30, 2024, net gaming revenue was $289.92 million and $871.30 million, respectively, reflecting increases of 5.8% and 4.8% compared to the prior year periods.

The company also generates revenue from amusement devices, manufacturing sales, and ATM fees. Amusement revenue for Q3 2024 was $5.10 million, manufacturing revenue was $1.71 million, and ATM fees and other revenue was $5.50 million.

Liquidity: The company's balance sheet remains healthy, with $265.08 million in cash and cash equivalents as of Q3 2024. Accel's total debt stood at $542.6 million at the end of 2023, resulting in a net debt position of $280.9 million. The company's strong liquidity and manageable debt levels provide it with the financial flexibility to pursue growth initiatives and strategic acquisitions.

As of Q3 2024, Accel's debt-to-equity ratio was 2.68, with a current ratio of 2.71 and a quick ratio of 2.63. The company has $273 million available under its $150 million revolving credit facility, further enhancing its financial flexibility.

Operational Highlights: Accel Entertainment's operational performance has been impressive, with the company continuously expanding its footprint and optimizing its operations. As of the end of 2023, the company had 4,014 locations across its core markets, with a total of 25,729 gaming terminals in operation.

The company's largest market, Illinois, has been a standout performer, reporting market-wide gross gaming revenue (GGR) growth of 5% year-over-year, outpacing the state's casino industry, which saw a 1% decline. Accel's success in Illinois is a testament to its ability to provide a superior gaming experience that resonates with local customers.

Revenue per location in Accel's core states saw increases, with Illinois up 1.7%, Montana up 3.7%, and Nebraska up 16.8% year-over-year. These increases demonstrate the company's ability to drive growth in its established markets.

In addition to its core route-based business, Accel has also been actively pursuing strategic acquisitions and partnerships to expand its reach and capabilities. The company's pending acquisition of Fairmont Park in Illinois, which includes a master sports betting license and a long-term partnership with FanDuel, is a prime example of Accel's ability to leverage its expertise in local gaming to capitalize on emerging opportunities in the broader gaming landscape. Accel expects this project to generate $20 million to $25 million in EBITDA over the next couple of years.

Risks and Challenges: While Accel Entertainment has demonstrated strong performance, the company is not without its risks and challenges. The distributed gaming industry is subject to extensive regulatory oversight, and changes in regulations across different jurisdictions could impact the company's operations and product offerings.

Additionally, Accel's business model is susceptible to macroeconomic conditions, as player demand and disposable income can fluctuate with economic cycles. The company's ability to manage its costs and adapt to changes in the market will be crucial in navigating any potential economic downturns.

Furthermore, the competitive landscape in the distributed gaming industry remains intense, with Accel facing competition from both established players and emerging operators. The company's ability to maintain its competitive edge through continuous innovation and operational excellence will be crucial to its long-term success.

Outlook and Future Opportunities: Despite the challenges, Accel Entertainment's outlook remains positive. The company's growth strategy is centered around leveraging its core route-based business, pursuing strategic acquisitions, and expanding into new markets as they legalize local gaming.

In its core route-based business, Accel targets low single-digit revenue growth, mid-single-digit EBITDA growth, and high single-digit free cash flow growth. The company is confident in achieving this "steady-state growth algorithm" while aiming to compress its core business capital expenditures towards $40 million over the longer term. For 2024, Accel expects CapEx across their core business to be between $60 million and $65 million, a decrease of more than 20% from the prior year.

The local gaming market that Accel operates in is estimated to be a $15 billion GGR opportunity nationwide. Accel sees opportunities for growth through expanding in its existing markets as well as potentially entering new states as they legalize distributed gaming.

Beyond its core operations, Accel's M&A pipeline remains active, as evidenced by the Fairmont Park acquisition. The company's ability to integrate and extract value from strategic acquisitions will be a critical driver of its long-term growth.

Accel Entertainment operates primarily in the United States, with its largest markets being Illinois, Montana, Nevada, and Nebraska. Illinois accounted for around 75% of total revenue in the recent quarter, highlighting the importance of this market to the company's overall performance.

Overall, Accel Entertainment's position as a leading distributed gaming operator, its strong financial profile, and its proven ability to navigate the industry's regulatory landscape make it an intriguing investment opportunity in the dynamic and evolving gaming solutions market. With a clear growth strategy, a solid financial foundation, and a track record of successful expansion, Accel is well-positioned to capitalize on the growing trend of legalized local gaming across the United States.