We’re at one of those points where bulls and bears argue the future of the stock market while others are in a quandary. The debate goes something like this:
Quandary: There are so many conflicting signals, I don’t know which way to go. Bull and Bear, give me some direction.
Bull: The future is bright. Look at the 18-year high in consumer confidence and the robust job markets. Those are the two measures most important for the outlook of the casino industry.
Bear: All good things come to an end. The fact is both the economic expansion and bull market are among the longest in history. Great age contains great risk.
Bull: We’re fine as long as consumers are fine, and they are strong and growing stronger as wages rise.
Bear: Rising wages also bring inflation, and that brings rising interest rates, so debt competes with stocks for investor dollars and higher borrowing costs slow the economy – and hence slow the consumer.
Bull: Interest rates have been too low too long. The economy can stand a return to normal rates, which will give it a firmer foundation and provide room to goose things through lower rates when the inevitable slow-down occurs.
Quandary: You guys aren’t helping me. What about gaming stocks, specifically?
Bull: Well, healthy consumer spending is just out-and-out positive for regional casino operators.
Bear: Profit growth isn’t being driven by consumers as much as by cost cutting, especially in promotions to lower-value players. Eventually, you reach diminishing returns and risk reaching counter productivity. As banking entrepreneur Vernon Hill used to say, you can’t cost-save your way to prosperity.
Bull. Want proof of higher stock prices to come? Look at the high prices casinos are paying to buy competitors, aided by the entry of REITs into the transactions. Casinos are finally getting the valuations they deserve.
Bear: Those higher valuations don’t come free. Casino companies benefit near-term by trading off land ownership to become renters, and rent is a whole new expense line, plus they lose the value of real estate as an appreciating asset.
Quandary: How about Las Vegas? MGM Resorts and Caesars say the third quarter will be weak, but then the city will rebound.
Bear: The weakness in third quarter room rates will dampen stock prices for at least a quarter or two until companies resume solid growth.
Bull: That’s just a short-term concern. We see the rebound already. For example, on their quarterly investor call, MGM reported a loss of 100,000 third quarter room nights but said the fourth quarter is 77,000 ahead of last year.
Bear: That isn’t a fair comparison. Last year’s fourth quarter was especially weak from business lost after the Mandalay Bay shootings.
Further, those lower rates aren’t hurting just MGM. By reducing room rates to attract more retail customers, they are forcing other operators to reduce prices in order to compete.
Bull: Las Vegas continues to have pricing power. Implementing and raising resort and parking fees is generating more revenues.
Bear: Yeah, a short-term feel good at the expense of long-term customer growth.
Quandary: What about sports betting? Won’t that create new revenue streams?
Bull: It sure will, and sports betting will drive more customers to casinos to spend elsewhere on property. And if sports betting goes online, then it’s Katie bar the door.
Bear: Yeah, and if betting adds 2.5 percent to revenues like it does in Nevada, big deal. And how many states will legalize sports betting and when? It will take years to play out.
Quandary: Okay, I still don’t know which way to go. I guess you pays your money and you takes your choice.
(Note: This column is written with all due respect to the late Pulitzer Prize-winning financial writer J. A. Livingston who created the Bull, Bear, Quandary debate for the also late Philadelphia Evening Bulletin.)
