FANTINI’S FINANCE: Growing Pains

Las Vegas and Reno are experiencing tremendous growth according to the U.S. Census, which bodes well for the future of the “locals” casino companies. But new markets like Brazil and Japan are again disappointing industry observers.

FANTINI’S FINANCE: Growing Pains

Las Vegas and Reno continue to grow rapidly, according to the US Census Bureau’s latest population estimates.

The population of Clark County, which is mostly Las Vegas, grew 2.2 percent in the year ending last July, the second-fastest growth rate in the country. Clark County now has 2.2 million residents, 13 percent over 2010.

Washoe County, which includes Reno, grew 1.8 percent to exceed 460,000 and is up 9.3 percent since 2010, though growth has accelerated in recent years thanks to major companies locating plants in the area, most famously Tesla and its battery giga-factory.

Further, growth should remain strong as retirees continue to flock to the Sun Belt, as major construction projects in Las Vegas boost the local economy, and as Tesla and others continue to build out their projects.

Those dynamics benefit all gaming companies in those markets, though those that focus on locals benefit more.

In Reno, Monarch Casino’s flagship Atlantis resort continues to get about half of its business from locals.

In Las Vegas, Red Rock Resorts is a nearly pure play on locals and Golden Entertainment and Boyd Gaming get a very large part of their business from locals.

 

Japan And Brazil, Not So Fast, Maybe

Where does growth come from for big casino companies as the US appears to be nearly saturated with casinos?

For the past several years, hopes have pinned on Japan and, more recently, Brazil. Certainly, if those two countries legalized casinos under favorable tax rates and regulation, they would represent huge opportunities.

But, so far, the going has not been what casino developers would like. Japan looks like it will approve enabling legislation requiring small casino floors and high tax rates. Brazil might not legalize casinos at all.

Interestingly, smaller countries could end up making the biggest splashes, with the Philippines growing at a rate greater than early skeptics thought likely.

But, unless a major new market opens, profit growth will have to come from less exciting places, such as paying down debt, consolidation, and continuing to develop non-gaming revenue streams.

 

Sell Off Opportunity

Sometimes, you’ve got to love it when the stock market hands you a buying opportunity by over-selling a stock.

That appears to be the case with Golden Entertainment, which has lost nearly a third of its value from its 52-week high.

Golden, which previously forecast EBITDA of $180 million, updated that to a 2018 forecast of $184 million to $194 million. In addition, the company announced a $140 million three-year renovation of its primary property, the Stratosphere in Las Vegas, in which it expects to generate a 15 to 20 percent return. Golden also expects to reduce debt-to-EBITDA down to 4.76 to five times this year.

Further, performance comes from steady businesses: slot routes, taverns and locals casinos, plus the Stratosphere.

Hardly a cause for a sell-off, but that’s what happened in an apparent convergence of profit-taking by investors who bought at much lower prices than the $24 and change where Golden is now trading, disappointment that financial performance and guidance wasn’t better, and concern that disruption of the Stratosphere could crimp results for a while.

The result is a stock now selling cheaply at around eight times enterprise-value-to-EBITDA and a forward price-earnings ratio of around 12 to 15 times, depending on most forecasts.

It is no secret that I have been a Golden fan, having originally purchased shares around $8.50 and steadily adding since then. The current sell-off was a reason to buy a little more.

Articles by Author: Frank Fantini

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

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