As of this writing, the big sell-off in gaming and hospitality stocks has stopped. The overall market has risen for the third straight day and gaming and hospitality, which led on the way down, are leading the rebound.
The rally was to be expected given how steeply stocks sold off. We’ll probably look back at the lowest point of the sell-off and tell the story of how we could have bought the best companies in gaming for amazing prices—Penn National under $4, Boyd under $7, IGT and Scientific Games under $4, solid REITs like VICI under $10 and Gaming and Leisure properties just over $13 with a dividend yielding 14 percent. And then there are the more speculative stocks—AGS, which touched, 70 cents, and Full House Resorts that touched 31 cents.
Some stocks sold for less than the value of their assets. Golden Entertainment fell to half of its book value, for example.
The stocks have doubled and tripled and more from those lows, yet they are still 50, 60, 70 percent and more below their highs.
That suggests there are still big profits to capture. But buying now isn’t the slam-dunk it was just a few days ago. One reason: the reality of the government-imposed economic recession is starting to hit.
Casino companies learned from the 2008-2009 debacle and are in fairly good shape financially. But companies elsewhere might not be financial fortresses. The confirmation by Cheesecake Factory that it will quit paying rent is an example. If retailers don’t pay rent, can mall owners make debt payments? If mall owners go into bankruptcy, what are the cascading effects of that?
Many politicians think handing out billions of dollars to hold people over until the pandemic has passed is a solution. But the impact of millions of unemployed people and thousands of business bankruptcies will have an effect long after Covid-19 has passed, and the sinking in of those realities might set off another round of fear and dismay driving stocks down again.
Still, it’s reasonable that, even with the rebound, gaming stocks are headed much higher over time.
The Big Three: LVS, WYNN, MGM
- LAS VEGAS SANDS. If there’s a casino company prepared to ride out the storm, it’s LVS. That’s thanks to its brilliant and determined founder and CEO Sheldon Adelson, who has insisted on keeping debt low.
With debt-to-EBITDA of just 1.5 times, LVS has a greater degree of safety than competitors.
Further, unlike domestic and many international casino operators, LVS is not shut down. Its properties in Macau remain open. And if China reopens to Macau in coming months as expected, operations there could keep the company cash flow positive.
All that combines to make LVS about as safe a casino play as there can be, plus it is positioned to grow when normality returns.
- WYNN RESORTS likewise is open in Macau.
Ironically, Wynn’s big VIP business, so recently seen as a relative drag on growth as competitors’ business models turned to the fast-growing premium mass-market, now finds VIP its strength. That is because the more tourist-oriented mass-market is all but closed while the hard-core VIP gamblers are returning sooner.
Wynn has higher debt than LVS and is more dependent on Macau so there is less security there, though it remains a gaming industry blue chip and also will benefit when premium mass-market returns.
- MGM RESORTS’ most interesting development is activist investors taking charge.
The culmination of that process occurred with the appointment of Providence Fund Equity Partners principal Paul Salem to chairman of the boards of both MGM and its 70 percent-owned REIT, MGM Growth Properties.
Salem has chaired the real estate committee of MGM’s board, which was created at the urging of the activists who felt the company should get more value from its assets. Since the committee’s formation, MGM has sold Circus Circus, sold and leased back Bellagio and is selling and leasing back MGM Grand and Mandalay Bay in a deal involving MGM Growth Properties.
Now, with investors in charge, there could be more major changes. Perhaps 50 percent-owned CityCenter changes ownership in some way. Perhaps there are more property sales. Perhaps MGM decides it is better to run the company more profitably than to chase a $10 billion or $12 billion Japan resort that might not pencil out.
Whatever it is, MGM will not be the same.
