We’re deep into fourth-quarter earnings season, with enough evidence in to reach some conclusions—the biggest one being that things are going about as well as can be expected for the U.S. casino industry. But…
It’s good news that casino operators are keeping their promises to restructure costs downward, even as business returns.
It’s good news that the Las Vegas Strip had a bang-up fourth quarter, even though group business, conventions and older players have yet to return to normal levels.
It’s good news that American consumers, despite negative sentiments recorded by confidence surveys, are acting confidently by spending on retail goods and entertainment.
It’s good news that Covid appears to finally be in long-term decline, meaning more travel, including from previously absent international visitors.
It’s good news that casino real estate deals continue to be done at healthy prices, both improving the balance sheets of companies selling real estate and building intrinsic value in companies that retain their properties.
It’s good news that companies across the board are reducing debt ratios, whether through refinancing, property sales or, best of all, by paying down debt through the application of growing cash flows.
And it’s good news that online sports betting operators, even if they haven’t gotten religion, are at least talking like converts about reining in promotional spending and seeing positive EBITDA on the horizon. Some are even projecting positive results, like MGM Resorts saying its BetMGM joint venture with Entain will be in the black on the EBITDA line in 2023 and perhaps even starting at the end of this year.
So where are the worries to tack on the wall?
In the macro, mostly, to use that piece of jargon that uglifies the English language.
And perhaps the scariest word of all in today’s economic environment is inflation.
Few people now believe that inflation, to use Fed Chairman Jerome Powell’s now infamous word, is transitory.
The near-term prospects are worrisome: Try to outrace inflation through higher prices and wages that may just feed it, or lift interest rates so far and fast that the inflation monster is vanquished by killing the economy.
Right now, we’re at the early stages, where companies speak optimistically about their pricing power and how consumers have not cut back spending in the face of those higher prices.
But there can come a time when we return to the 1970s condition of stagflation, when consumers quit spending enough to offset the impact of inflation on corporate bottom lines.
It’s worth remembering that inflation lasted a very, very long time during that era, and was only put down when Fed Chairman Paul Volcker began instituting such steep interest rates in the early 1980s that the economy went into the deepest recession since the 1930s.
We’re in a world where we talk grimly about 10-year notes breaching 2 percent and home mortgages 4 percent. In that era, mortgage rates and junk bond interest rates went into the mid-teens.
But companies can only focus on what they can control. And right now, the executives leading America’s casino companies seem to be making the right decisions. We’ll just hope the dwindling number of transitory believers prove right.
