Two themes are emerging as gaming companies report third quarter earnings:
- Business at casinos is strong and older players, international players and conventions are returning, all boding well for the near-term future.
- Inflation is starting to have its effects driving up the cost of food and utilities and other expenses, chipping away at the big EBITDA margins that casino companies have so proudly achieved.
Hovering over these conflicting trends is a Federal Reserve Board of Governors determined to put the brakes on inflation even at the cost of a recession.
As mentioned in my last column, casino companies have considerable underlying strengths. They have cut costs. Balance sheets have been strengthened and will be strengthened further. There is plenty of room for revenue growth, whether through existing operations or geographic or physical plant expansions.
But for the foreseeable future, there remains that risk of a Fed-induced recession to worry investors.
And the worry is setting in. An interesting example is Caesars Entertainment. On Tuesday afternoon, the company reported strong earnings and CEO Tom Reeg led a bullish conference call highlighting that strength and the company’s improving financial performance and positive outlook.
On Wednesday, the stock did what it should have done. It jumped nearly 8 percent. Then the Fed announced its latest 0.75 percent interest rate increase and Chairman Jay Powell spoke. In less than two hours traders gave away all the gains and a little more.
That sell-off affected the entire market, though consumer discretionary stocks—among them casinos—fell the hardest.
If the Fed continues raising rates and scaring off investors and a recession ensues, you can say good-bye to all the sanguine talk about consumers continuing to spend. They won’t. Even without a recession, there is mounting evidence that the cash hordes consumers built with Covid relief money are finally nearing depletion and will not be there to finance gambling jaunts.
Sprinkle in higher prices and less discretionary income and the outlook for entertainment companies dims into a world of stagflation. Go past stagflation to full recession and the result for consumer discretionary companies is the same.
Additionally, weaker economic conditions will bring lower earnings followed, of course, by lower stock prices likely compounded by tumbling valuations.
If that scenario comes to pass it will spell for long-term investors two enticing words: buying opportunity.
The underlying strengths of today’s casino companies and their still-to-fulfill business opportunities will remain regardless of inflation, recession or bear markets.
If history repeats, the road back to higher stock prices will begin before the economy recovers, so any investors waiting for the all-clear signal will miss the big up turn.
In short, now and the near future should be good times for long-term gaming investors to be buyers.
Now, for Macau
Readers of this space are accustomed to my warnings about investing in Macau casino operators. And, for those keeping score, my bearish stance has proven correct big time.
But conditions change and now is the time to reverse course and endorse buying the stocks, and especially those of the U.S. listed companies—Las Vegas Sands, Melco Entertainment, MGM Resorts and Wynn.
Macau casinos may never return to the revenue levels of several years ago. In fact, I doubt that they will, given the Chinese Communist Party’s antipathy towards gambling.
But the national Chinese government is not about to crush Macau’s economy and, for the foreseeable future, that economy depends on the health of its casino industry.
Travel will soon resume to Macau from Mainland China and revenues should grow substantially over the next year taking stock prices with them. That should present a significant trading opportunity. Note, I said trading opportunity, not investment opportunity. Those believing the long-term bullish story for Macau gambling risk being burned by that Communist antipathy.
Of course, this depends on one big caveat – the renewal of gaming concessions. We’ll know the answer to that soon enough with current betting that they will be renewed.
