Penn National and Las Vegas Sands kicked off the second quarter earnings season with reports that contained good news, but that caused investors to sell off the stocks and those of their peers.
For PENN, investors worried more about lower than forecast revenue than they did about greater than forecast profitability.
For LVS, they worried more about a bad quarter in Singapore than they did about strong performance and pounding-the-table bullishness about in Macau.
PENN did what other regional casino operators have been doing, and what it has long announced as a priority—focusing on profitable revenue.
The result was a 1.33-point improvement in EBITDA margins to 29.88 percent, though at the cost of lower revenue.
The phenomenon should not have come as a surprise. Boyd Gaming CEO Keith Smith has addressed it directly, and expressed confidence that there is plenty of opportunity ahead to cut costs to improve the bottom line.
And Eldorado has made similar cost reductions a central part of its acquire-and-grow strategy, bringing down revenues and raising profits at virtually every property it has acquired as the company has transformed from a small Reno operator to a national powerhouse of regional casinos.
Future cost savings are almost guaranteed as PENN, Eldorado and Boyd are purchasing more properties from which to squeeze out savings. PENN, for example, expects to cut $100 million in costs after it buys Pinnacle Entertainment.
Of course, they know revenue growth must come over time. You can’t cost-save your way to prosperity, entrepreneurial banker Vernon Hill used to say.
The guys running PENN, Boyd and Eldorado know that. And that, in turn, is what long-term investors need to know.
Las Vegas Sands missed earnings expectations by a nickel a share ending at 74 cents in profits.
However, normalize table hold and EBITDA, which rose 1.4 percent, would have leaped 11.6 percent to $1.23 billion. And in Macau, EBITDA would have soared 21.3 percent to $597 million. Those are big numbers for one quarter, and a seasonally slow quarter at that.
The culprit was weak VIP performance in Singapore where EBITDA plunged by $132 million to $368 million.
But every other measure in Macau and Singapore was strong—mass-market play, premium-mass market performance, retail sales, hotel occupancy and rate.
COO Rob Goldstein literally pounded the table on Macau in his company’s investor conference call.
He pointed to market share growth in a growing market, forecast 20 percent and 30 percent returns from planned hotel renovations and expansions, pointing to similar results at recently renovated Venetian rooms as the model, and cited continuing VIP improvement.
Most of all, Goldstein crowed about the big and rapid growth in visitation from affluent Chinese customers outside of nearby Guangdong province.
That vast Chinese market is why LVS built its 13,000-hotel room complex. Those affluent Chinese are the future, Goldstein said.
Meanwhile, the fact is that Singapore VIP performance has been volatile and will continue to be, meaning the company is as likely to have an upside surprise in future quarters.
Obviously, a lot more that makes up financial performance than cutting regional marketing costs and explaining away a tough quarter in Singapore.
But whether it is LVS or U.S. regional casino companies, second quarter results and outlook should give investors more reason to run to the stocks than away from them.
