FANTINI’S FINANCE: Managing Expectations

Earnings season is supposed to be a time when company executives can explain their strategy and how the quarterly results have demonstrated its success. But too often, executives use the time to lower expectations and offer often conservative guidance.

A new earnings season has begun.

This time, with most casino operators having started a new fiscal year, many of them will provide 2014 outlooks that investors can count on in their decision-making.

When guidance is as specific as earnings per share and EBITDA, this annual ritual—often updated quarterly—can make life a lot easier for investors.

Often, executives are criticized for making conservative projections, which can be characterized differently depending on the belief of the listeners—either concern that things aren’t going as well as management otherwise says, or suspicion that management is being overly conservative, perhaps to the point of sandbagging.

Put another way, what management says, and how it says it, can be more of an effort to manage expectations than to enlighten.

Still, guidance does put management on the record presenting expectations to which they can be held to account, as well as give investors more information upon which to base decisions.

Some companies, such as Penn National, historically have been very detailed, presenting tables with earnings per share, revenue and EBITDA and comparing previous guidance to actual results.

PENN also has among the best conference calls, with CEO Peter Carlino often noting that pertinent information had been provided in the news release and/or 10Q, and simply opening the full hour to Q&A.

Hint to CEOs and IR directors: PENN’s approach would be a good one to follow, especially for equipment suppliers who breathlessly read quarterly recaps that no one can keep up with and thereby waste 30 to 50 percent of the time that could go to insightful discussion.

A few true highlights would do if the scripted information has been made available already.

It will be interesting to see if Carlino’s successor at Penn National, Tim Wilmott, continues the practice, and whether Carlino will still, now that he’s CEO of spun-off Gaming and Leisure Properties.

Meanwhile, here are a few topics that may come up this quarter:

Regional casino operators. Do they still see, as they have for years now, no evidence of consumers coming back and opening their wallets?

Las Vegas-Macau casino operators. The first half of 2014 is a dandy for group business in Las Vegas thanks to several large trade shows, but what about the rest of the year and heading into 2015?

In Macau, how much of their growing revenue is falling to the bottom line in improving margins?

Longer term, and more difficult to answer in having to mind political p’s and q’s, investors should listen closely to questions about concession renewals and table game caps.

Casino executives are usually reassuring about getting enough tables to justify their multi-billion dollar investments in Cotai mega resorts.

But Macau officials consistently say they are sticking to the limit of 3 percent growth citywide each year, which isn’t enough. More recently, there have even been hints—or what some interpret as hints—that the government might also limit electronic table games, which are proliferating in the face of the live table cap.

And while everyone expects casino concessions to be renewed, the rules and tax rates can have a profound impact on profit growth.

Suppliers. With the big wave of domestic casino expansion and the Canadian VLT replacement cycle now past, how will profits grow?

That is especially the question as more competitors move in, participation lease revenues remain stagnant, and as casinos continue to shrink slot floors.

Obviously, online, social gaming, new products and new technologies are among the responses to that environment.

That ought to lead to some really interesting discussions, if there’s time left after the script reading.

Articles by Author: Frank Fantini

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