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FANTINI’S FINANCE: Funny Fundamentals

Two recent cases where casino stocks took huge turns demonstrate how fickle investors can be. The fundamentals of the business in both instances changed not an iota, yet the stock prices took a wild ride. Find out why!

For most investors, gaining 15 percent a year would be pretty good work and over a lifetime of investing such returns can lead to significant wealth.

And the way to get there for investors who make their decisions based on the financial fundamentals of companies is through a steady process of analysis, evaluation and reevaluation.

But then funny things happen like stocks moving 15 percent in a day and you realize that a lot of investors really act emotionally.

Two such cases have come about recently with casino operators.

Isle of Capri dropped 15 percent on the day it announced earnings per share that met expectations, growing EBITDA, and higher revenue at most of its properties.

The culprit: overall revenues were slightly below expectations as the company shifted promotional sending to focus on high value customers, allowing it to both generate greater profitability and lower marketing costs.

On the flipside, Wynn Resorts soared 15 percent when it was revealed that CEO Steve Wynn bought 1.004 million shares at an average price of $63.61.

In both cases, the companies’ fundamentals hadn’t changed an iota from the day before.

ISLE grew EBITDA 9.3 percent in its second quarter. Adjusted earnings per share nearly quadrupled from 5 to 19 cents. EBITDA margin improved 1.59 percentage points to 20.5 percent.

Isolated from revenue expectations, those were pretty strong results.

Wynn’s fundamentals have been hit by the decline in Macau business with the result that the stock suffered a nearly 75 percent decline from its high of over $240 last year.

Steve Wynn buying shares didn’t change those fundamentals.

In some ways, the reactions are understandable. ISLE has a long history of under performing its regional casino peers, so a little bump in the revenue road could cause some investors to step back, though we’ll suggest that the company has been focused and performing throughout CEO Virginia McDowell’s tenure. In short, she’s been proving through results and probably has earned credibility.

Likewise, Wynn Resorts has been such a winner for so long that when Steve Wynn makes a significant commitment out of his own pocket, it’s bound to send his intended message that the stock is undervalued.

It’s also worth noting that at its stock price in the high 60s, as it is as of this writing, initial investors have still enjoyed a nice total return of appreciation and dividends.

In the long term, we suspect that Isle of Capri will continue to improve, and that Wynn Resorts will bounce back as Macau stabilizes and Wynn Palace opens their next year.

In the meantime, 15 percent swings in a single day present opportunities for investors who do make decisions based on fundamentals.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.