The thud you heard after Boyd Gaming released missed earnings might finally have been the shoe fall so many have been predicting for so long.
We’ll know soon enough as third-quarter earnings reports flood in, but the circumstances that depressed Boyd’s earnings and blunted bullish sentiment about its outlook appear to be more about the casino industry finally being hit by a slowing economy and inflation than about any missteps by Boyd itself.
That is why, while Boyd’s stock plunged 11 percent in reaction, other Las Vegas and U.S. regional casino stocks fell with it.
Boyd, after all, isn’t some speculative sports betting or iGaming flier with a fast-talking CEO promising profitability in some distant future while celebrating reduced losses as victories.
Boyd is Steady Eddie. In fact, it’s the steadiest Eddie in the industry. Use terms like blocking-and-tackling or putting one foot ahead of the other; use whatever term you like, Boyd Gaming typifies prudence and reliability.
Boyd makes incremental investments in existing properties that produce returns on investment. Another example: while other companies wildly spend on promises of future iGaming profits, Boyd bought and now operates a proven digital platform and is actually making money—$65 million or so in EBITDA this year for starters. Boyd pays a dividend. Boyd buys back shares. Boyd improves its balance sheet.
In another era (like a few weeks ago) the stock would be rewarded.
But casinos may be entering a time when a slowing economy, inflation and an end to revenge entertainment spending catch up with it. Thus, the sell-off in casino stocks.
In another era (like several quarters ago) companies facing signs of troubled consumers would slash spending to maintain, or even grow, margins and CEOs would smile like Cheshire cats over their ability to diminish the customer experience not only without paying a price, but in being rewarded with greater profits.
But there comes a point at which costs have been cut. If that happens as consumers succumb to inflation and a slowing economy, math says profits will fall. And stock prices will follow.
As mentioned, we’ll soon see whether Boyd’s third-quarter experience was commonly shared among U.S. casino operators.
If so, the next questions will be how long the funk will continue, how low profits will go and how low stocks will fall?
We’d like to think that stock prices won’t go down much. After all, gamers already have had their bear markets. Boyd, for example, is 26 percent below its 52-week high as of this writing. Red Rock Resorts is down 23 percent, Caesars 36, and PENN Entertainment 52 percent.
Other casino stocks have fallen similarly. But it’s probably wishful to say that the selling is done. The reality of lower profits, if the economy really hits the skids, can drive stocks down further.
Nor can gaming’s low valuations offer much comfort. It’s always been true that gamers have both defensive and growth qualities that others can envy, but that hasn’t prevented them from historically selling at valuations well below other entertainment or consumer discretionary industries.
Sometimes, investor sentiment is investor sentiment and one just has to live with it. Look at Apple. No matter that revenues are declining or that it may be nearing saturation of its most profitable markets or that it lives with potentially devastating geo-political risk. Heck, it’s buying back shares, that’s good enough for investors to keep its stock at 22 times enterprise value-to-EBITDA or 27 times forward earnings.
So, casinos at seven and eight times EBITDA is just the way of the world and there appears no likelihood valuations will rise, no less match those of other industries, no matter how many shares Boyd and peers repurchase.
So, for long-term investors, look at today’s depressed prices as buying opportunities and be prepared to ride out an unpleasant experience that could last a while.
