So, if you haven’t yet bought U.S. regional casino and gaming equipment stocks, have you missed the boat? Their rise from mid-March lows has been stupendous:
SUPPLIERS Low May 20 Price
AGS $0.70 $4.82
Everi $1.55 $5.72
IGT $3.59 $8.29
Scientific Games $3.76 $14.45
REGIONAL CASINO OPERATORS
Boyd $6.44 $19.84
Century $1.01 $4.17
Churchill Downs $52.90 $120.47
Eldorado $6.02 $31.25
Full House $0.31 $1.92
Golden Ent. $3.55 $10.79
Monarch $12.83 $35.90
Penn National $3.75 $26.81
Looking at these numbers, the answer to the above question is clearly yes. In retrospect, who wouldn’t buy a solid name like Penn National at $3.75, IGT at $3.59 or Boyd at $6.44, or take a little more risk with Scientific Games at $3.76 or Golden Entertainment at $3.55? And anyone simply taking a flier could have a seven-bagger with Full House Resorts or AGS.
Of course, in this manic-depressive stock market, driven by rumors of coronavirus vaccines and fears of the pandemic resurging, there’s no guarantee that we won’t see those lows again.
But on the assumption that we won’t, where do we go from here? Basically up, we think, though it may be a long time to get to new peaks, with accompanying risks and valleys.
A bull case can be made for every company listed above. The suppliers are interesting.
IGT and Scientific Games have their solid lottery businesses as downside protection. Everi has its payments side. Sci Games also has its team of former Aristocrat executives, who will give its gaming business direction, and maybe vision. It can also benefit by reducing debt leverage and from its majority stake in fast-growing social gamer SciPlay.
AGS is more dependent on casino customers than the others, but it has enough new and underpenetrated markets to resume being a growth story.
Among the operators, there are several opportunities: using the reopenings to reduce operating costs permanently, buying properties at bargain prices from unfortunate small operators overcome by the government-ordered closures, attracting customers to what are expected to be the relatively fast-recovering drive-to properties.
Among operators, PENN and Boyd are well-run, geographically diverse, prudent and, we suspect, will take advantage of this opportunity to make their operations more efficient and margins higher.
Churchill Downs, as has been mentioned in this space several times, is the quiet star of regional gaming. It’s shown it can grow through acquisition, has a proven online betting operation in Twin Spires, and knows how to capitalize on and grow its prize franchise, the Kentucky Derby.
Eldorado has its pending acquisition of Caesars, and few observers doubt that CEO Tom Reeg will streamline its operations.
Monarch is as well run as a company gets, with a strong balance sheet. With the soon-to-be-completed transformation of Monarch Black Hawk into a destination quality resort, it can turn its attention to acquisitions.
Those drive-to locals markets will benefit Boyd, Red Rock Resorts and Golden Entertainment in Las Vegas and Century throughout its network.
Golden should benefit by being hyper-local, with its Las Vegas taverns and Nevada and Montana slot routes. And in an environment where small businesses have been under great stress, Golden could grow its portfolio by buying a few taverns or route operations.
And while the expected slow Las Vegas Strip recovery might be a drag on the Vegas economy, there’s no turning back southern Nevada as one of America’s fastest growing regions, which will benefit Boyd, Red Rock and Golden for the foreseeable future.
Full House is so small that any significant positive can move the needle, and with always-thinking CEO Dan Lee, something will.
Finally, locally oriented casinos have both demographic and business profile advantages over destination markets. Demographically, their customers tend to be older. Many are retired with reliable incomes, not unemployed or trying to get back to even keel. In terms of business, their customer bases are whole. They largely don’t have fly-in, international or convention business to lose.
So, if the current partially recovered stock prices hold, it will be back to fundamental analysis for investors. But from a strategic standpoint, the gaming equipment and regional casino stocks should be long-term plays.
