A number of key companies have reported fourth-quarter earnings by now, and CEOs have offered updates on the New Year and the outlook for the year ahead.
So far, if there’s a surprise, it’s that there have been no surprises.
The big Las Vegas-Macau casino operators continue to plow ahead through travel restrictions. Regional casino operators continue to grow profits and increase margins through cost cuts, while customers are proving resilient. The U.K. and Swedish online and sports betting companies continue blow-out revenue growth as they capitalize on their U.S. opportunities.
There have been a few bumps along the way for the international iGamers, including tightening regulations in the U.K. and elsewhere in Europe, but the wave of American states authorizing online gaming is great enough to swamp their effects.
All of this comes against the backdrop of a bull market in stocks that, while not universal, has enough pockets of speculation to amount to multiple bubbles. GameStop is that phenomenon’s poster child.
Gaming appears to be one of the speculative sectors, as stock prices rise and sell-side analysts raise price targets, in some cases on very high valuations of revenue and/or EBITDA that they project for several years out.
The assumptions are that customers will be awash with money and a desire to spend it when the Covid pandemic ends, that casino operators will maintain cost cuts even as customers return, and that sports betting and iGaming are unstoppable fountains of enormous new revenues.
Rising prices and bullish calls feel good, but as often stated in this space, there are reasons for caution: incipient inflation, computer-chip shortages stopping auto production, cargo cost imbalances slowing some exports, and, of course, the apparent bubbles.
So put us in the bull camp, but with fingers crossed on both the economy and the market.
A Tale of Two Companies: One Big, One Small
Wynn Resorts and Full House Resorts are casino operators on the opposite ends of the spectrum. Wynn is big and international. Full House is small and hyper-local.
Both, however, have taken actions that should hold them in good stead during this strange, Covid-skewed world.
Wynn is raising more than $800 million by selling stock while prices are high. That should put its cash trove at more than $4.3 billion, giving the company lots of growth choices as we move away from the pandemic.
With so many companies enjoying high stock prices and with so much opportunity ahead, either post-pandemic or in development of online gaming, it’s a wonder more companies don’t take advantage of today’s environment to raise money.
Full House is raising money by borrowing it to finance the expansion of Bronco Billy’s Casino in Cripple Creek, Colorado.
It’s no accident that Full House stock has risen from its historic norm, around $2 to $3 a share, to around $9 as of this writing.
A company with EBITDA historically below $25 million a year is now seen as an $80 million or more producer as it extends Covid-learned cost-cutting with the transformational expansion of Bronco Billy’s.
It doesn’t take a math genius to put pencil to back of envelope and come up with a stock price of $12, $13 and higher if Full House achieves that level of earnings.
That has always been true. But there’s always been skepticism by many investors that the company is too small to finance such a project. Now it has financing, and doubters can become believers.
There’s one more opportunity for a leap of faith: Waukegan, Illinois.
Always-creative CEO Dan Lee has come up with a clever approach to winning the casino license in the Chicago-area city. Lee is proposing a small, thus relatively inexpensive to build, project. It’s focused not on scale, but on quality—a boutique casino for high rollers.
Winning the license might be a long shot going up against the partnership of much-larger Churchill Downs and hometown favorite Rush Street Gaming.
But if Full House pulls it off, $12 or $13 for the stock might be a bargain.
