It’s that time again when the world slows down for the holidays and there is time to reflect upon the past year and muse about the coming year.
2016 was good for the gaming industry. Las Vegas boomed. Macau rebounded. Regional markets finally fully recovered. Interest rates remained low.
For a punctuation mark, the year ended with Japan finally legalizing casino resorts, creating a golden opportunity for the big casino developers like Las Vegas Sands, Wynn, MGM Resorts, Genting and others.
And, as always happens, most prognosticators expect trends to continue.
However, my concern is that the long economic recovery might be at least interrupted by recession, challenging a new President Trump who is already being challenged by adversaries burned by his election despite losing the popular vote and by his acrid campaign.
If 2017 meets bullish expectations, companies to look out for will be MGM Resorts and Caesars among the big operators and Eldorado and Boyd among the big regionals.
MGM has become the analysts’ darling as it focuses on debt reduction and profit growth. The company has been helped by the Las Vegas boom. MGM ended the year with its own exclamation point as National Harbor opened near Washington, D.C., an affluent, recession-proof market of 9 million people counting Baltimore.
Caesars will likely get its operating company out of bankruptcy early in the year and begin to be followed by investors on its fundamentals again—and they are healthy fundamentals that have been masked by the bankruptcy, management says.
Eldorado will more than double in size in the second quarter when it closes on the purchase of Isle of Capri. ERI thinks it can significantly improve ISLE’s margins and it has the track record to give that goal credibility. Further, ERI looks to expand even more through acquisitions.
Boyd Gaming has quietly put itself in a growth position with three recent casino acquisitions in the Las Vegas locals market, and by owning a chunk of resurging downtown Las Vegas.
Here are some broader thoughts on 2017:
• Regional casinos depend most on the health of the economy.
There are some signs that the long recovery might be ending. The year is ending with a spike in initial jobless claims and slump in consumer spending. These are not trends, but they do break positive trends and will deserve attention.
The much-publicized troubles brewing in the subprime car market look eerily like the housing collapse of eight years ago. Now, cars are not housing, but the automobile industry is still an important component of the economy.
Then there is the Federal Reserve intending to steadily raise interest rates.
The rate hike announcement led to an initial stock sell-off, breaking the winning streak started after the presidential election.
As we all know, higher interest rates will compete with stocks for investor money.
For the gaming industry, higher rates will mean fewer expansions penciling out, and more cash flow going to debt service.
The Fed plans to return interest rates to a more normal level, so this isn’t like Paul Volcker slaying inflation with punishing rates, but it still has an effect.
Interestingly, high rates could benefit slot machine companies that fund giant jackpots through annuities. Scientific Games’ debt is at fixed rates and neither it nor IGT has any debt maturing next year so they’re insulated from the negative effect of higher U.S. interest rates.
• Las Vegas is booming and there is no reason for the boom to end as long as people continue moving to the Sun Belt, and that is for the foreseeable future. Reinvestment continues to make LV the city that reinvents itself.
However, the Great Recession showed that Las Vegas is not recession proof, so there could be a serious interruption of the boom.
Otherwise, it’s all systems go for the companies that have tied themselves to LV’s future—MGM, Red Rock Resorts, Boyd, Golden Entertainment.
• Reno and Denver are boom towns, too. That is good news for Monarch, which has two casinos, one in each market, and Eldorado, which has a big Reno presence and will add Denver when it buys Isle of Capri and its two Black Hawk casinos.
• Macau. If U.S. regional casinos depend on the economy, Macau casinos depend on government policy.
Policy now appears sanguine, even accommodative, after several years of near hostility.
So, the questions will be how much Macau recovers, how well it fends of growing regional competition, and how well each operator performs in an ever-crowded market.
If I had to put a few words on it, I’d say I’m neutral on the market and unsure who wins and losses in the competitive struggle, though Las Vegas Sands has the proven business model and its new Parisian fits hand-in-glove into it.
Finally, the Chinese economy could fall into recession, exacerbating the competitive fight.
