Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: Q4: What We Learned

In the reporting for the fourth quarter, regional casinos seem to have benefited from good weather and lower gas prices. Previous cost cutting seems to have also helped. But Macau weakness is dragging down companies with exposure there

With fourth quarter earnings season just about over, we have an opportunity to see if there are any lessons or themes from financial results and management outlooks.

Regional rebound. It is clear from both fourth quarter financials and the January revenue reports from states throughout the country that gaming revenues have surged in the past two months.

The reasons are not entirely certain.

Much better weather this year is clearly a factor as casinos have not lost multiple days to blizzards. Lower gasoline prices put more money into pockets. Improved discretionary spending by consumers has been portended by America’s significantly improved jobs picture and accompanying rise in consumer confidence.

If the factors are primarily weather and gasoline prices, the improvements will pass.

If they are a stronger underlying economy, then, fingers crossed, they can be sustained.

Certainly, the CEOs who led their company conference calls were nearly unanimous in saying the improvements are about more than weather.

In what is now a famous example, MGM Resorts CEO Jim Murren noted on his company’s call that one party spent $300,000 on dinner at an MGM property in Las Vegas.

It will take more of that kind of spirit to carry Las Vegas back towards its 2007 spending peak, he said.

For regionals, February, March, and even April will give us a better idea.

Earnings leverage. For a long time, it has been the mantra of regional casino executives that they had so cut down their cost structures that even modest revenue increases would fall through to the bottom line.

Boyd Gaming appeared to offer some proof of that when it converted a 1.6 percent fourth quarter revenue increase into a 6.4 percent jump in EBITDA.

Other companies, such as Penn National and Pinnacle, showed they still can improve margins.

Continue those December and January revenue gains into the spring, and we’ll get a fair idea when first quarter numbers come out about that operating leverage.

Suppliers, the wait continues. The news about supplier companies in the past year has been all about consolidation. Scientific Games, four companies not long ago, is now one, in the best example of consolidation.

Much of the financial justification for consolidation has been in wringing out costs. For way too long, companies have competed against each other in an arms race of more engineers and design teams and product lines and marketing budgets, all for smaller slices of a market crowded with new competitors.

But what is needed for gaming technology companies to flourish is growth and, to date, their casino customers have been reluctant to increase spending on new games and software.

If the U.S. casino industry really does rebound strongly this year, we’ll get to see if that leads to increasing orders. So far, it hasn’t.

Macau outweighs Las Vegas. As much as we’d like to ballyhoo the Las Vegas comeback, it’s hard to do when the three big LV-Macau operators—Las Vegas Sands, Wynn and MGM Resorts—appear to have lost more in Macau’s decline than they’ve gained so far in LV’s recovery. Given that Macau is several times the size of Las Vegas, that result is simple math.

Two companies that might bet on Las Vegas are MGM and Boyd.

MGM gets 60 percent of its business from the Strip, and has new casinos rising in Maryland and Massachusetts, both opening new markets and increasing its ability to cross-market into Las Vegas.

Boyd has no Macau exposure and is riding the Las Vegas wave on all three counts—the tourist recovery, recovery in the locals market, and a strong Downtown.

Combine that with any recovery in regional markets and BYD could end up being a pure play on US gaming, generally.

• Less Debt, More Filling. Another theme among casino companies is lower debt and, so far, the leaders of these companies appear to have gotten religion on the topic.

Whether it’s Boyd or Pinnacle, Isle of Capri or MGM Resorts, debt and leverage ratios are coming down.

Caesars, trying to restructure debt at its operating company down by nearly $10 billion in bankruptcy court, has a different approach, chosen by force.

And Wynn, refinancing down debt to lower interest rates, has yet another approach that will save it around $25 million a year, or better than 20 cents per share in earnings.

That doesn’t mean there isn’t more capital spending coming. Wynn, MGM and Las Vegas Sands are all financing Macau projects. And MGM has its Maryland and Massachusetts casinos to build.

But the era of ever-higher debt ratios appears to have passed.

Articles by Author: Frank Fantini

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