We’re at that time when we’re marking time. All the news we’re likely to get about second-quarter business trends is in and we’re just waiting on earnings season to begin in several weeks.
We’re also, in a larger sense, in an industry that is marking time. As mentioned in this space before, gaming’s great growth era is behind it and even the newest kids on the block, online sports and casino, appear to have lost expansionary steam, or at least are napping until 2025 legislative sessions convene.
Nor is there much merger and acquisition activity as the Feds’ policy of interest rates being higher for longer dampens any consolidation binge. And with AGS stock selling 8 percent below its buy-out price, and IGT and Everi tanking ever since announcing their planned merger, stock investors aren’t exactly piling into the little activity there is.
Nor is technology giving stock prices a boost. Intelligent tables are nice, but primarily an extension to existing products. Cashless gaming was announced breathlessly but so far doesn’t evidence much breath of life. Artificial intelligence, the mania in so many industries, sounds good, but may be limited in gaming where game outcomes must be random and where designing promotions based on what might be considered too much information about customers could open the doors to accusations of player manipulation or just plain be a kill-joy for customers already up against house advantage.
International expansion has possibilities, such as Brazil. Otherwise, investors aren’t too excited that, say Thailand, might be in a race to open casinos in five years and beat out Japan’s one opening by a year, or that the Muslim Middle East might become the new Las Vegas.
So what do gaming investors need?
From this seat, there are two things: superb management and return of capital to shareholders.
Management is more important than ever. There are few cases today where a CEO can simply pencil out a 20 percent return on investment. And most projects today aren’t big enough to move stock prices. So, profit growth must be largely based on existing property footprints.
And just like the easy pickings of growth are behind, so are many cost saving opportunities, with so many having been implemented by necessity during Covid. Technology can help cut costs, but that will require cooperation from labor unions and will have to be part of policies that truly enhance customer experience, not as penny-pinching that takes the fun out of going to casinos that, after all, only prosper if customers see them as fun.
So, successful managers will focus on growing the amount of free cash to distribute it to shareholders in ways that make their holdings more valuable on a per-share basis.
Certainly, dividends are one way to share profits directly with shareholders. However, companies are understandably reluctant to pay out too much in recurring dividends, wanting to keep their options open for investment in growth while avoiding the risk of shattering investor confidence if dividends must be cut some day.
That leaves share repurchases. To date, Aristocrat, Light & Wonder and MGM Resorts are gaming’s repurchase leaders. Elsewhere, the model is Apple, which manages to achieve record stock prices through aggressive share repurchases even with weak revenue performance.
To summarize, our preference in selecting companies in which to invest are those that:
- Invest in growth judiciously.
- Do not sacrifice customer experience on the altars of cost cutting and adding fees.
- Pay a dividend and buy back shares aggressively.
