Quandary: Bull and Bear, with third-quarter earnings season over I thought it’d be a good time to get your take on the state of gaming for investors. It seems to me that stocks have sold off enough. Then again, business trends aren’t exactly effervescent. What do you think?
Bear: Well, it’s easy, Q. Just look at gaming revenues throughout the country. They’re dropping faster than a Formula 1 VIP package. Revenue declines lead to profit declines that lead to stock declines. It’s that simple.
Bull: Well, CEOs still report that business is holding up.
Bear: Up where? Let’s see. Detroit land-based fell 19 percent last month. Indiana plunged 10 percent, Iowa 6 percent. Macau is up but still way below pre-Covid. Even the vaunted Las Vegas Strip would have been negative in the last reported month if casinos hadn’t played lucky at the baccarat tables.
If you really want to quote CEOs from Q3 conference calls, count the number of times they said the outlook is uncertain, which is another way of saying not so good.
Then look around the rest of the economy. Sales are flagging. And if you want an indicator, look at the Dow Transportation Index. It’s down 11 percent since August and Transports lead the economy and the economy leads the market.
Bull: Not so fast, my friend. If the economy is slowing down—and you might be right about that—it also means the Fed is done raising interest rates, and, in fact, might start cutting at some point.
Quandary: But if the Fed cuts rates because the economy is weak, doesn’t that mean business will slow for casinos, resorts and hotels? I’m already seeing reports that businesses are starting to cut back on convention and conference expenses for next year.
Bull: Yes, but here’s the but: Stock investors will respond to lower rates. They’ll anticipate lower rates will revive economic activity and they will buy stocks in that anticipation. It has happened historically. Stocks start to climb before the economy recovers. Just keep an eye on Bear’s Transportation Index. That’ll show you.
Bear: Well, Bull, I’m glad you’re agreeing with me that Transports say we’re in for some rough times, but you’re forgetting something, we won’t know how far down and how deep a slow-down, or recession, will be until we get there. Buy too early and you’ll regret it.
Bull: Or wait too long to buy and you’ll regret it.
Meanwhile, look beyond business trends. Look at valuations and balance sheets.
Gamers have had their down market. Stocks are cheap based on debt-to-EBITDA or price-to-earnings. In a way, a recession already has been priced in.
Bear: Well, Sunny, I’ll stick by what I said. We don’t know how deep a slowdown will be. Valuations might actually be high today if earnings fall tomorrow.
Bull: And I’ll stick by my position. Prices are historically cheap. Even if the economy slips and takes stocks down with it, today’s prices are bargains. I won’t try to be a market timer.
Bear: Or a market realist. By the way, you mentioned balance sheets. Need I mention that debt-to-EBITDA ratios can still become problematic if EBITDA falls? And higher interest rates aren’t helping companies with their variable debt.
Bull: Well, Bear, we agree on that. A stock investor would be wise to make sure that an improved balance sheet means a strong balance sheet and friendly debt covenants in case things turn south.
Quandary: Wait a minute you guys. Quit agreeing. You’re confusing me and I’m confused enough.
