The yield curve has inverted.
Consumer confidence is declining.
The U.S.-China trade war is starting to bite consumers and businesses.
Class of 2019 college graduates aren’t finding jobs.
Business investment has slowed.
So, is this a time to buy, sell or hold casino stocks?
Let’s see what our experts think:
Bear: Those are a lot of negative trends to buy into, especially for a consumer discretionary industry. People who don’t have jobs or can’t make their car payments aren’t going to blow a grand at the gaming tables.
Contrarian: With a recession possibly coming, the bear case appears compelling, but buying during a time of pessimism can bring good returns over time.
Bear: Have you ever heard about not catching a falling knife? Better to wait for a certain bottom.
Bull: And if you wait to see the bottom it will be in your rear-view mirror and you’ll miss out on the biggest upward moves. Besides, valuations are modest today, especially for regional casino stocks.
Bear: Bull, I like your enthusiasm, but the lesson of history is that once stocks start to drop, they continue to drop. As for valuations, that’s a relative term. Seven times lousy EBITDA, or no earnings, isn’t cheaper than 10 times good earnings. And with casino companies selling off their real estate and becoming tenants of REITs, maybe they deserve lower valuations. Better to own than to rent, you know.
Quandry: You guys are confusing me again. What I do know is that we see gaming revenues continue to hold up, even to grow when factoring out the severe winter weather and spring flooding that hit some markets hard.
Bear: Well that hasn’t helped their stocks. Look at these drops from 52-week highs:
- Golden Entertainment -54 percent
- Penn National -48
- Red Rock Resorts -38
- Boyd -37
- Eldorado -31
Now, imagine how much of a blood-letting there will be if a recession hits and EBITDA falls and leverage ratios rise.
Bull: But they’re bargains now. The damage has been done. Besides, these companies are run leaner than in the last recession and the next recession is much more likely to be a classic business cycle decline and not a financial bubble bursting like in 2008.
Contrarian: I’ve got to say there’s some truth to what Bull says. Further, there are companies that have special situations, like Golden Entertainment, as it plays on both southern Nevada population growth and on turning around historically under-performing properties, and Eldorado’s likely ability to extract value out of Caesars once it closes on that acquisition.
Bull: In addition, you’ve got some companies whose smart and prudent growth provides defense against a bear market.
Look at Monarch Casino, down just over 8 percent because it continues to grow, has a transformational project nearing completion in Colorado and has managed to protect its balance sheet. It’s going to generate a lot of free cash flow and pay down debt really fast once the new Monarch Black Hawk opens.
Or look at Churchill Downs. It’s even hit some recent highs because it has been making digestible sized acquisitions and might be the only incumbent casino operator in Illinois for which the newly authorized gaming expansion is a clear positive.
Contrarian: Bull, I like your story, but maybe we should just wait a while to see whether there’s a recession and how much it affects regional casinos. I’m willing to lose out on some early gains until the picture clears if the market recovers before I expect it to.
Quandry: Well, that’s it. Enough pros and cons to confuse me. Thanks, guys.
