It’s hard to get beyond the current obsession with the Federal Reserve Board in order to focus on the fundamentals of individual companies.
That may be especially true of gaming stocks, which fall into the category of consumer discretionary, a sector hit hard by the growing expectation that the US economy is headed into recession this year or next.
Year-to-date, gaming stocks have performed about in line with the overall market. Fantini’s North American Index, a cross-section of gaming companies in the U.S. and Canada, is down around 22 percent year-to-date, about matching the decline of the S&P 500 and considerably better than the Nasdaq’s 30 percent dive and the Russell 2000’s 37 percent plunge.
Sports betting and iGaming stocks have fallen harder, with the respective Fantini indices down 34 and 37 percent year to date. However, stocks in those indices have still outperformed the older more conventional stocks over a longer period of time. The North American Index, for example, stands around 83 compared to its base of 100. The Fantini iGaming and Sports Betting indices are still in the black at 143 and 138 as of this writing.
Still, to use the old saying, the stock market is a market of stocks. Some will do better and some worse than the overall market or their peers. The question, of course, is which ones.
We’ll get some inkling on those answers in several weeks when gaming companies begin reporting second quarter earnings, report on current business trends and offer guidance on financial performance expected for the remainder of the year.
To date, gaming CEOs have been confident, if not downright ebullient, on the prospects of their companies. Those bullish sentiments have been based on maintaining the high EBITDA margins achieved during the Covid epidemic and the rush of business by individual customers, especially among their best customers.
One reason for the confidence has been the continued strong spending habits by consumers, especially related to travel and entertainment. That is commonly held to be the result of pent-up demand combined with substantial savings accrued during the period of Covid lockdowns and federal stimulus spending.
Now, casino operators, especially those in Las Vegas, may have two more positive forces working on their behalf: the continuing return of conventions and major events and the reopening of the U.S. to international visitors.
But there are no endless blue skies. Here are some clouds to look for in upcoming earnings season investor conference calls and in analyzing revenue and other performance numbers to be released in weeks and months ahead:
- The soft underbelly. It’s fine for the best customers to be strong, but the signs that inflation is draining consumer means and mood will come at the lower end of the economic scale. Thus, it will be wise to look for weakness among low-value customers for early warnings that core customers also might cut back play and visitation.
- Been there, done that. Satisfying pent up demand doesn’t mean there will be continuing demand. Customers willing to pay high air fares to finally get the heck out of the house might have their appetites sated by their long-awaited trips. Forward bookings on airfares and cruise lines might be indications of whether the rush to spend is, to use one of Fed Chairman Jay Powell’s formerly favorite words, transitory.
• Valuations. The bull market of the past several years has resulted in high valuations. Those valuations were neither normal nor sustainable, as the sports betting and i-Gaming stock sell offs have evidenced. Investors would be prudent to value stocks based on historic—or even somewhat below—multiples of earnings, EBITDA and free cash flow.
