Description
Accel Entertainment
Accel Entertainment (ACEL) is an operator of Video Gaming Terminals for third party establishments. It buys VGTs from manufacturers, then rents them out to bars, restaurants, alcohol serving joints and manages the machines to earn money from gamblers. The income earned from VGTs are split amongst (a) the joints that host the VGTs, (b) the local or state government taking a cut out of the machines’ gambling earnings, and (c) Accel Entertainment, as the operator/owner of the VGTs. ACEL is profitable, growing top line 20%+ CAGR over a decade, with stable margin and high cash flow. Earnings should grow at mid-single digits going forward, but it’s trading at 10x PE. ACEL is also cheap compared to comps.
Video Gaming Terminals (VGTs) are arcade machines running gambling games, such as slots or card games. Unlike the gambling machines specifically domiciled in casinos, VGTs are specifically installed in non-casinos settings, such as restaurants, clubhouses, bars, truck stops, and other alcohol licensed establishments. VGTs are income producing assets. They generate Net Terminal Income (NTI) which is the money from what people put into play minus what the VGTs payout for win. Categorically, Net Terminal Income earned from VGTs are split amongst 3 parties, (i) Licensed Establishments - this is the place wherein the VGT is placed, such as bars, restaurants, parlors; (ii) Terminal Operator - this is the company that owns and manages the VGTs. Accel is a terminal operator; (iii) State and local Government - they receive a cut as taxes; the money appropriated can be used for any number of purposes. (iv) a negligible portion of NTI (like 1%) is paid the vendor of central communication system installed on the VGT. For instance, in Illinois, 1% of NTI is paid to Scientific Games. Currently, only ~10 US states have legalized VGTs, but just like iGaming (online gambling), the trend US wide is slow but steady marching of adoption by more states. This development is positive for VGT operators.
ACEL operates VGTs in a handful of states. Topline growth comes from operating more machines. ACEL has grown from organically and via acquisition.
Below are the key states for ACEL
State
VGTs in the State
Economics
Comments Illinois 8,630 locations
48,600 machines Annual earning averages
$104k per machine. Splits:
VGT operator 32.5%, govnmt 34%, location owner 32.5% IL has the most VGT nationally. 6 VGTs allowed per location. 10 per truck stop. Number of location in the state continues to grow, at LSD. Total number of VGTs in the state grows at MSD. Montana 1,400 locations
16,000 machines Annual earnings averages $106k per machines. Splits
VGT operator 42.5%; govnmt 15%; location owner 42.5% In January 2025, a bill was introduced to raise video gaming wager limit from $2 to $4. Nebraska
1,600 locations
5,900 machines Annual earnings averages
$67k per machine. Splits:
VGT operator 40%+; govnmt 5%; location owner 35% Since legalization in 2020, the state saw 60% growth over the past several years. Based on momentum, strong growth should continue. Nevada 170,000+ machines Economics are undisclosed, but are negotiated amongst parties. VGT operator often get 32%+ of the split. Slot machines are allowed outside of casinos. Establishments can have 15 machines. Highly competitive market given abundant gambling competition in the state. Louisiana 1,500 locations
12,000 machines Annual earnings $50-100k depending on location.
Splits: 26% gvmnt; 37% VGT operator; 37% location the market been around for 30 years. VGTs installed at bars and truck stops. Both fragmented. In bars, the machines used are legacy equipment 20+ years old.
Investment Thesis
Straightforward, desirable per machine economics. By my research, VGT operators like Accel buy these ready-to-deploy VGTs from manufacturers at cost averaging $20-30k per machine. Once deployed, average machine typically generate $100k+ per year. Terminal operator gets a 30-40% cut out of this figure, so payback is 1 year. Return on capital is evidently quite attractive. There are other miscellaneous fees that I’ve not accounted for, but nothing meaningfully dampens the quite attractive economics.
Growth of VGT industry. Historical trend has demonstrated that VGTs are popular with businesses and government because they generate good revenue, but as of 2025, only 10 US states have legalized VGTs. They are Illinois, Indiana, Iowa, Louisiana, Montana, Missouri, Tennessee, Oklahoma, South Dakota, and Texas. In each of the state where VGT is legal, adoption has been strong. Each year, more establishments like bars or restaurants are licensed for VGT. In Nebraska for instance, since legalization in 2020, VGT in the state has blossomed by 60%. Businesses are finding this passive asset to be a good additional source of income. Government are supporting the endeavor because they get a cut of the profit, which contributes to many government’s perennially underfunded status. Americans also loves to gamble, and demand for VGTs shows no signs of saturation. Bear in mind that in all states, there is a per bet wager limit, of $2-5. No high stakes here, just people playing with chump changes. Yet VGT is already generating prodigious cash flow. On the back of (a) more VGTs adoption in each state where it’s legal + (b) VGTs conceivably legalized in other states + (c) upping the wager limit (which states have a proclivity to do over time), there is a robustly growing TAM for ACEL. IMO: industry revenue growth of HSD for a decade is realistic.
ACEL is a market leader with scale. Like in other businesses, scale often begets scale. This business is ultimately commoditized. VGT operators all acquire the same variations of machines from a dozen or so manufacturers. Differentiations for operators stem from customer service, operating proficiency (including what games to offer and replacement of older machines, etc), and sales. ACEL is the largest operator in Illinois with 1/3 of market share. In Montana, and Nebraska, it is also growing. ACEL can leverage its scale and reputation to offer better pricing and is more accessible to establishments who wants to partner with a VGT operator. Lastly, still with lots of smaller players, the VGT operators landscape is ripe for further consolidate. Public peers like ACEL generally trades at premium valuation to private targets, so ACEL stands to gain from absorbing smaller operators accretively, as it demonstrably has in the past.
ACEL margin stable; revenue should CAGR MSD to HSD. The VGT industry is still largely fragmented and players appetite for VGT as alluded to earlier has not saturated. Management has reiterated repeatedly intention to achieve long term growth of LSD topline; MSD EBITDA growth; and HSD FCF assuming normalized capex. In the current environment, ACEL should be able to achieve MSD to HSD topline growth from the combination of (a) location growth + (b) VGT growth per location + (c) revenue growth per machine. This modest growth assumption is well supported by ACEL’s historical operating results. I see 3-5% top line growth for meaningful number of years to come. The margin should incrementally improve also because operator’s split of gaming machine income is stable in each state and contracts are conventionally almost a decade long. With variable cost predictably static, ACEL’s overhead of personnel costs should be distributed over larger base of operation and revenue base as ACEL grows, so overall margin should be improve as the business growth.
Call option via accretive M&A. The VGT industry is still mostly fragmented, with many small private operators valued at low EBITDA multiples. This means ACEL can continue to execute a opportunistic M&A strategy of multiples arbitrage. This not only enables ACEL to deepen footprint in existing states, but also affords possibility to penetrate new states. And market generally responds to ACEL M&A positively.
Casino buildout in Illinois. Press ACEL is expanding to beyond just gaming machines to casinos and horse racing. In 2024, ACEL bought Fairmount Holdings for $35 million in stock. The deal gets for ACEL the only active racetrack in Illinois, with 65 race days and ~435 horse races annually. The facility generated $29 million 2023 revenue and modest Adj. EBITDA, but ACEL will invest $85-95 million over the next 2 years to build a Phase I temporary casino site and then a Phase II permanent casino site. The Phase I temp casino is expected to launch Q2 2025, with 255 machines. The Phase II permanent casino is expected to roll out by by YE2027, with 600+ slot machines + 24 table games. Once complete, the site expects to generate $25 million of Adj. EBITDA and 75% FCF, making the entire asset a 16% IRR project. The deal received comments from the city major and Illinois government people, all signs of ACEL’s blessing from local community.
Valuation
ACEL is currently trade at ~11x owner’s earnings. With MSD earnings growth, it should trade at least 15x earnings.
Risks (What could go wrong)
Execution delays in casino buildout. The Phase I and Phase II build out of the Fairmount acquisition could be delayed for a variety of operational reasons. Any delays or project cost overrun during the buildout would impair profitability and impinge on the ACEL prospects and stock price.
Gambling is a highly discretionary spend. Amidst an already turbulent 2025 ensnared by chaotic tariff threats and looming economic slowdown, gambling arcade machines would be the type of venues highly vulnerable to spending pullback. However, the magnitude of a deterioration should be weatherable. Look at 2020, business shut for several months and revenue dropped $100 million, declining 25% y/y, but operating cash flow including working capital still broke even instead of significant burn. If economy slow downs this or next year, it’s conceivable that topline would decline by 5-10%. While this dents short term prospects, long term prospects would be intact.
Regulatory changes. Nothing imminent comes to mind, so this is more of a black swan factor. Should any states where ACEL operates ban gambling or promulgate laws detrimental to gaming arcade machines, ACEL will feel the impact. Competing interests that would work against ACEL’s industry include (i) regular casinos - which dislike gaming machines because they compete against similar machines in casinos. I read one casino owner lamented, “why do I pay expensive licenses and build a casino, when the same machines are played at someone’s local bar 5 minutes walk from their home?!” (ii) state regulators - who are always eager to increase their cut of the gaming profits by raising taxes; (iii) moralists with ESG concerns - whom I sympathize with… because IMO crudely put, many forms of gambling including VGTs are effectively an instrument of wealth transfer.
Catalyst
1. Accretive M&A of new locations.
2. More states legalizing VGTs.
3. Good execution on Fairmount in 2025.
4. Existing states promulgating supportive laws like permitting more VGTs per location or upping wager limit.
v. 4.20
