Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: Quarterly Questions

With an uneven year behind us, what will 2016 bring for gaming investors? The fourth quarter reports should give some hints about some of the issues that follow the gaming industry this year.

The fourth quarter earnings season kicks off Wednesday with Las Vegas Sands first out of the gate.

There have been some hints of what is to come such as Wynn Resorts having preannounced that it will report better results than expected thanks to a combination of the Las Vegas rebound and cost cutting in Macau.

Amaya says earnings and EBITDA will be at the top end of its guidance, and that debt ratios will be at the low end.

Regional gaming revenues were strong in the fourth quarter, with just some unusual quirks like Midwestern flooding affecting some properties, so there is optimism about what Boyd, Penn National, Pinnacle and Isle of Capri will report.

Otherwise, the fourth quarter looks like it was largely uneventful, and the real question is what’s happening in the New Year.

Here are some questions to ponder about this New Year:

• Regional gaming stocks soared a collective 45 percent last year, Thomas Allen of Morgan Stanley noted.

After such a leap, how realistic is it they can repeat, or at least grow double digits to justify continuing to buy or hold their stocks?

In this regard, the first quarter will be more important than the fourth because comparisons to the previous year will be harder to beat. Top last year’s Q1 handily and there will be greater reason for optimism.

• Las Vegas Sands, MGM Resorts and Wynn are caught between a resurgent Las Vegas and their difficulties in Macau, which raises these questions:

How much have they reduced dependency on Macau?

As Cameron McKnight of Wells Fargo has pointed out, Wynn, the most Macau-dependent of the three, has reduced its Macau EBITDA to 60 percent of its total. But, realistically, Macau is still the Big Dog in Wynn’s world and will remain so.

How will these operators perform after their Macau mega resorts open later this year? Will they grow the market? If so, will it be enough to offset higher operating costs? Cannibalize each other?

Moody’s, in downgrading Wynn’s corporate family credit rating a notch to Baa2, did so principally based on a bearish outlook on Wynn Palace, which opens in the second quarter.

• What will the financial environment be like?

The fourth quarter marked the end of an historic era of forced low interest rates. Rates are still low and a timid Fed might keep them that way if the economy shows so much as a hint of catching the sniffles.

With such low rates, casino companies will still be able to lighten their debt loads through refinancing. But if rates continue to rise, there will be a point where the line is crossed and the increased expense of variable interest debt will start to drag down earnings. Whether this shows up in the first quarter is doubtful, but many Fed watchers expect rates to rise again this year.

• Which way will economies turn?

The US economy continues to gain momentum as consumers benefit from low oil prices just as some industries suffer from them. Further, wages are starting to rise, and will be forced to rise at the lower end by higher minimum wages required in many states. And a positive offset of higher interest rates will be to put a few more dollars in the pockets of many older citizens, who are among the best casino customers.

On balance, in an economy dominated by consumption, US casinos should benefit.

Then there is China. We’ll offer no guess as to which way the Chinese economy will go, but it does seem that a lot has been done to stamp out corruption and begin the shift towards more of a consumer economy.

If China does rebound somewhat in coming quarters, it should give some relief to Macau’s beleaguered casino industry, and just in time.

Articles by Author: Frank Fantini

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