The conventional view is that the U.S. gaming industry is near maturity.
The evidence for that view is commonly cited:
- Revenue growth nationally has slowed to low single digits.
- New casinos now more cannibalize competitors than grow their markets, and they under-perform the forecasts upon which they were authorized and financed.
- The rise of mergers and acquisitions and growing number of dividend payers are classic signs of a mature industry.
And all of that is true.
However, that doesn’t mean investors can’t make money. Nor does it mean that gaming growth is slowing. What we are seeing isn’t so much the maturing of gaming as it is the maturing of the traditional casino part of the gaming industry.
Let’s look first at mergers. It is true that much of the corporate growth has been in acquisitions. Boyd Gaming and Penn National have long been consolidators.
But money can be made in that environment for a long time. An analogous industry is newspapers. The ink-and-paper industry peaked after World War II. Then television did its number on newspapers, especially afternoon newspapers, which began to disappear.
The decline in the number of newspapers even prompted a concerned Congress to enact a law allowing competing newspapers to enter joint operating agreements to act in concert in ways that anti-trust laws do not allow in other industries. Yet the number of newspapers continued to decline.
The result for investors of the dwindling number of newspapers? Record profits and stock prices.
The reason for this paradoxical result was that surviving newspapers gained print advertising monopolies in their markets and were able to price their way to prosperity.
Of course, the internet has overwhelmed newspapers and magazines today, but for decades investors made good money buying stocks like Gannett and the Washington Post.
In the casino industry, we’re seeing the results of consolidation in lower costs that generate higher profits.
Eldorado stock, for example, has been trading in the upper $40s, a 10-fold increase from when it began its acquisition run five years ago. The company believes it can gain enough cost and revenue synergies acquiring Caesars Entertainment that it will achieve $10 a share in free cash flow. That suggests the stock price can more than double. And with gaming revenues still growing, not declining as newspaper circulation did, growth beyond that should continue.
Then there is money to be made owning stocks of companies to be acquired. With REITs now in on the acquisition deals, sellers are getting higher prices than in the straight buyouts of old.
Again, using the proposed Eldorado-Caesars merger as an example, Caesars stock has risen 30 percent since chief shareholder Carl Icahn said in mid-February that the company should be sold. Under the Eldorado deal, shareholders will get more like a 40 percent profit from mid-February. But better yet, Caesars shareholders will get stock giving them nearly half ownership of Eldorado, thus they will be positioned to also enjoy Eldorado’s expected growth.
Like so many recent acquisitions, this one is being facilitated by a REIT, in this case, VICI Properties, which was spun off from Caesars two years ago. VICI is buying several Caesars properties and amending leases for others, thus generating $3.2 billion to help make feasible Eldorado’s purchase of the larger Caesars.
The bottom line: the U.S. casino industry might be maturing, but there are still out-sized opportunities for investors.
Next time, we’ll look at the segments of gaming that are young and growing.
