Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: Strength In Numbers

U.S. regional casinos are continuing a remarkable rally that began last year. The February numbers are out and virtually every market has seen an increase, some more than double digits. So what’s up?

Positive trends for U.S. casino operators have accelerated to the point where no one can doubt the industry’s strength and vigor.

Gaming revenues have risen in nine of the past 10 months and February looks gangbusters.

Here are February’s year-over-year increases in gaming revenues from states that have reported as of this writing:

Maine                    20.51 percent
Maryland               12.66
Delaware               11.40
Ohio                      10.74
Pennsylvania slots   9.26
New York                7.61
Illinois                     5.17
Indiana                    4.28

Casinos benefited from Leap Year, but the extra day just added 3.6 percent of time to casinos.

The strength has whetted the appetites of private capital that acquired casinos in restructurings or at bargain prices. At least three such Las Vegas properties are on the market—Fontainebleau, Palms and Aliante.

MGM Resorts is cashing in by selling the Crystals shopping mall for $1.13 billion.

Companies are also looking at grand plans to attract more customers. MGM is adding to its already market-leading 3.5 million square feet of convention space and supports the Las Vegas Convention and Visitors Authority’s plan to dramatically expand the world’s largest convention center. Las Vegas Sands is proposing a 65,000-seat domed stadium. The 20,000-seat MGM-AEG arena opens next month.

So, with all of this good news and optimism, how will casino stocks fare?

To start with, a big caveat: The economic recovery is long in the tooth and could go south undercutting the current momentum.

Plus, the financial markets aren’t exactly rosy, with stocks basically being on break for the past year and less-than-robust bond markets blamed for Crown Resorts not yet starting its Alon project on the Las Vegas Strip, while Genting sure is taking its time with Resorts World, not having started construction three years after buying the former Echelon project and a year after a ceremonial groundbreaking.

Finally, the healthy growth in gaming revenues and last year’s especially good weather makes for tougher comparisons ahead.

So, with those reservations put on the table, the answer is yes, gaming stocks can go up from here.

While the economic recovery is aging, jobs and wages are finally catching up and can continue for a while. The biggest spate of casino openings is behind meaning less cannibalization.

But perhaps most important, casino stocks are not expensive.

As usual, the big LV-Macau operators are the most expensive, but not by their historic norms. Consider these forward price-earnings and trailing enterprise value-to-EBITDA ratios:

COMPANY        PE        EV-EBITDA

MGM                 18.7     11.6
LV Sands           18.9     12.2
Wynn                   19      15.2

Valuations of regional casino companies are even more modest:

COMPANY        PE        EV-EBITDA

Isle of Capri        9.4        6.6
Pinnacle            11.8      9.05
Eldorado           12.6      10.2
Boyd                    13      10.2
Monarch            15.5       7.6
Penn National    15.8       8.7

Those are reasonable PEs and downright low EV/EBITDA ratios for ISLE, MCRI and PENN.

Further, several companies have growth catalysts like PENN to manage the new Jamul Indian casino 20 miles east of San Diego, Monarch ramping up its Black Hawk expansion and PNK continuing to ramp up and yield-manage its Ameristar properties.

And all the regional operators have low cost structures after years of belt-tightening, meaning a higher percentage of additional revenue falls to the bottom line.

Finally, while focusing here on casino companies, it will be worth watching the suppliers. As everyone knows, the stocks of the two biggest, IGT and Scientific Games, have been hit by debt taken on in mergers and the seemingly forever slowness of the North American replacement market.

But anecdotally, the newly confident casino companies intend to start reinvesting in their slot floors. And healthy gaming revenues should mean accompanying growth in gaming operations revenues for suppliers.

If the replacement cycle and gaming ops recover, they will generate significant new revenue for debt reduction. That can turn investor sentiment around.


Articles by Author: Frank Fantini

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