Quandary: Bull and Bear, I’ve called you in today because I just don’t know which way gaming stocks will go. They seem to have been down so far for so long that they just ought to go up at some point, but…
Bear: But you can’t go up where the only growth is in expenses, not revenues. And when you get growth in revenue, it’s either in a new property that cannibalizes its neighbor or in some highly touted online company that is addicted to losing money.
Bull: Now, wait a minute, Bear. I’ll admit stocks have been depressed for a while, but the key word there is depressed. They’re selling way below their value on almost every fundamental measure – price to sales, EBITDA multiples, free cash flow multiples, compared to their historic valuations, profit margins.
Bear: Ever hear of a value trap, son? There’s a one-word definition for it. It’s gaming. The stocks are down, down, down and when they move, guess which direction they move? Quandary, wanna try?
Quandary: Down?
Bear: You got it, kid. Listen. Gaming had a good run, but the industry is mature. There are some growth patches, but they attract profit-deflating competition. Brick-and-mortar revenues are starting to be lost to online gaming. And online operators—despite promises to the contrary—are still mostly losing money. Where revenues are growing they are being chewed up by higher labor and other costs. And get this, while overall revenues are up nominally, they’re actually down when you factor in inflation.
Bull: Bear, do you have a rear-view mirror attached to your head because the only thing you seem to see is where we’ve been?
Look, interest rates will soon be going lower. That’s going to help facilitate acquisitions where buyers can take advantage of those low valuations and sellers can still make a profit. That’s going to lift valuations – for everyone. And lower rates will help all companies because they can refinance debt at acceptable levels, which should 1) reassure investors and 2) in some cases actually reduce costs. That will raise valuations, too.
Bear: Wow. Talk about trying to make a silk purse out of a sow’s ear. If the Fed starts to reduce interest rates, it will be because the economy is slowing, fewer jobs are being created, and that, my fine bovine friend, is not good for discretionary spending, meaning not good for the bottom lines of casinos and resorts.
Quandary: But won’t we have another new element at play with a new president next year?
Bull: Good point, Quandary.
Bear: What do you mean good point? You have two candidates that, each coming from a different direction and with a different populist appeal, will run up deficits. In fact, they’re like the Will and Willa Rogers of government finance. Neither one has ever met a deficit they didn’t like. And you know higher deficits will mean higher inflation, which will mean higher interest rates, which will mean recession. So there goes your sunny argument, sonny.
Quandary: Okay, guys. That’s enough. Thanks for your help. I think.
