FANTINI’S FINANCE: Hold Those Feet to the Fire

As fourth-quarter earnings report season begins, it’s important to hold the big names accountable for any less-than-stellar performances. The time for glittering generalities has passed, and some investors may wish to make the switch from potential and promises to performance and profitability.

FANTINI’S FINANCE: Hold Those Feet to the Fire

We’re days away from the start of fourth-quarter earnings report season and perhaps never has the temperature reading and the outlook on business trends been more important for gaming stocks.

The big questions are just that—big.

Is Macau coming back, and how much and how fast?

Is the American casino business starting to show the same weakness as other consumer-sensitive businesses, such as retailers and banks? Relatedly, will those proud EBITDA margins hold up, or will they erode in a weaker business environment?

Are online sports betting and iGaming operators making real and meaningful progress towards profitability?

Perhaps most importantly, CEOs and CFOs on the investor calls will need to supply tangible and substantial evidence to support any bullish commentary or forecasts. Generalized feel-goods won’t cut it.

It’s A Roller-Coaster World

The wild rides taken by Macau casino operator stocks and those of online gaming companies have been nearly beyond belief.

Take DraftKings as the poster child for the manic-depressive world investors have participated in—and helped create. At $13.89 as of this writing, the stock is 81.3 percent below its high of just under two years ago. That is frighteningly bad, but still 42.2 percent off its lows. Yet, the company that continues to promise a future profit still has believers. It would jump 47.4 percent to reach analyst consensus forecasts, for example. That would be a handsome gain from the low, though still 72.5 percent below its peak.

DraftKings is not alone. The online gaming space is littered with fallen stocks that are still seen as eventual winners—at least from today’s prices, though that may be small consolation to those who bought them during their manic phase.

However, it is where stocks go from here that matters, and as mentioned above, our advice to investors is to insist on evidence of progress, not just projections, and they should almost immediately drop any stock whose CEO or CFO uses the term “total addressable market” to explain away the hemorrhaging.

Slow And Steady Can Win The Race

Meanwhile, in this attention-span-of-a-TikTokker world, there still are companies building profitability by blocking and tackling.

Many of them are regional casino operators, a group some investors are willing to abandon out of fear of recession while they rush into the embrace of money-losing iGamers.

Regionals have long been favorites of ours. It’s hard to beat a Churchill Downs, for instance, with its nearly unstoppable step-by-incremental-step expansion. Or Boyd Gaming, which simply runs competently and has an actually profitable online operation as a kicker.

Among these companies are those that have a large presence in Nevada locals markets—Monarch Casino, Red Rock Resorts, Golden Entertainment, the aforementioned Boyd Gaming.

Nevada’s population has long been growing faster than the nation as a whole, along with the Sun Belt generally.

But it is also worth noting that Nevada’s newcomers are proportionately more affluent, which is why Red Rock is upgrading properties to appeal to more monied customers.

A major reason for the trend is that neighboring California has been driving out businesses.

The Kosmont-Rose Institute of State and Local Governments at Claremont McKenna College in California has published some eye-opening statistics on this accelerating trend.

From 1990 to 2019, the institute found, Las Vegas was the top recipient of relocated California businesses—2,832 of them. Neighboring Henderson ranked seventh at 771 new businesses. Combined, these Las Vegas Valley neighbors more than doubled New York state, which ranked second at 1,455 relocators.

Reno didn’t do badly, either. It attracted 1,088 California businesses, proportionately more than Las Vegas.

Also on the list of top California business recipients is Lake Havasu, Arizona, feeder market to Laughlin, the Sin City alternative 90 miles south of Las Vegas.

So, for long-term investors, Nevada-focused locals operators have substantial demographic winds at their back.

Articles by Author: Frank Fantini

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

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