FANTINI’S FINANCE: Revenue Rebound?

For the first time in several years, there is hope that the Great Recession is over for U.S. casinos. National gaming revenues grew in October and regional growth continued as well. What’s the message?

October presented the best evidence yet that the US casinos are coming back after years of fits and starts since the Great Recession slammed the industry.

Regional gaming revenues grew a healthy 2.91 percent and total national revenues, which include Nevada, rose 0.72 percent to $3.15 billion, according to Fantini’s National Revenue report.

It was the fourth time in six months that national gaming revenues have grown.

And, while regional same-store revenues fell 0.9 percent, much of that can be accounted for as cannibalization from new casinos in Ohio and Maryland. Otherwise, those casinos grew the market.

In Ohio, for example, same-store revenues declined 9.31 percent, but the state as a whole grew 37.73 percent thanks to the five new racetrack slot casinos.

Similarly, Maryland revenues jumped 30.79 percent thanks to Caesars’ new Horseshoe in Baltimore, yet same-store revenues slipped just 3.08 percent.

Cordish’s Maryland Live! remained the state’s top casino despite the new competition, down just 2.98 percent year-over-year to $50.281 million.

CEO David Cordish has since been quoted as saying Maryland Live! is actually up in November.

Almost every jurisdiction enjoyed improved results in October.

The extent of the improvement is seen in comparing October to year-to-date figures through September:

                                     October               YTD through September

Regional                         +2.91 percent         -1.27

Regional same store        – 0.9                      -3.53

U.S. total (Includes NV)   +0.72                     -0.97

U.S. same store              – 1.93                     -2.66

It must be noted that October was helped by a calendar that included nine Fridays and Saturdays compared to eight last year.

In addition, markets that had suffered from new competition and/or the soft economy are growing again—Reno, Delaware, the Mississippi Gulf Coast, Black Hawk.

Even the surviving casinos in Atlantic City are growing again.

There are encouraging signs that growth will continue.

Consider: The U.S. economy is growing, and more than expected. Consumer confidence is at the highest level in years. Lower gasoline prices put more money in consumers’ pockets.

For their part, casinos are operating on leaner budgets, meaning that a higher percentage of additional revenue will fall to the bottom line.

So, if this is the start of an extended up cycle, what should investors do?

One answer is to try to pick winners among the regional casino operators. There are plenty of candidates:

• Penn National has a growth pipeline.

• Pinnacle and Boyd have impressive free cash flow and tax shields.

Pinnacle should unlock value by spinning off its real estate into a REIT, and Boyd might also create one.

Monarch and Eldorado are positioned to benefit from the resurgent Reno market, which should grow for years thanks to Tesla Motors and Apple operations that will add thousands of high tech jobs.

In addition, Monarch will benefit from renovation and expansion in Black Hawk, and Eldorado will gain efficiencies as it integrates recently acquired MTR Gaming.

Isle of Capri might be bought out—or consider a REIT structure.

Another option is to buy a basket of stocks. That would cushion any downturns to individual companies, such as if the new Golden Nugget takes a big bite out of PNK’s L’Auberge money machine in Lake Charles, Louisiana.

Finally, here’s a bit of a different name to consider: MGM Resorts.

Historically, MGM has been the big Las Vegas Strip play.

But it has considerable regional presence with casinos in Detroit, Biloxi, Tunica and half of Borgata in Atlantic City.

Now, MGM is adding casinos in Springfield, Massachusetts, and at National Harbor just outside Washington, D.C.

National Harbor is as close to a slam-dunk success as there is in today’s increasingly saturated markets.

It shares the 9 million-plus residents of the affluent Washington-Baltimore region with limited competitors, has no competition to its south, and will enjoy the huge tourism and convention visitation of the nation’s capital.

Further, this growth comes just as MGM improves its balance sheet, cutting interest expense, and will triple its Macau operations when its new resort in Cotai opens in less than two years.

Finally, MGM still has that big Las Vegas presence at a time when LV appears to have its mojo back.

Articles by Author: Frank Fantini

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