Second quarter stats and management outlooks for the near future are starting to come out, and so far, so good.
The current state of gaming business and outlook appear something like this:
- Online gambling companies have been prospering while their brick-and-mortar cousins have been closed. The question becomes how much of this windfall will stick once casinos fully reopen and customers become comfortable traveling.
- Sports betting companies have seen their businesses suffer, but are also seeing a big bounce as eager gamblers jump all over the first major sports to resume contests. Looking into next year, sports will fully return and U.S. states will continue to legalize betting, so this is a growth industry, as clearly as riverboats were in the 1990s.
- Regional and locals casinos are living up to the expectation that their businesses will recover sooner and to a greater extent than destination markets. More importantly, cost reductions have considerably offset the effects of lower revenues, and it appears executives are committed to permanently reducing money-losing or marginal amenities. Bye-bye, buffets.
- Destination markets, also as expected, are in extreme difficulty and it looks like they’ll stay that way. Singapore air travel is restricted. Macau feeder markets essentially have shut down travel. Air traffic into Las Vegas remains minimal, and conventions there continue to be canceled. Knocking out CES is not bullish for 2021 to be anything but a bridge to 2022.
- Liquidity remains an issue, but no longer an urgent one. Gaming companies largely have done an excellent job of cutting expenses and arranging to have cash to tap into so they’re not facing imminent crises.
- Diversification matters, maybe more than ever. That was proven in the recent financial performance of Scientific Games, which has its steady lottery and fast-growing SciPlay’s online operations to help blunt the impact of Covid-19 on its gaming business.
- Geographic diversification was demonstrated by Boyd Gaming, as its regional and locals-oriented casinos combined with serious cost-cutting to both produce an outperformance in the second quarter and, more important, offer a roadmap back to profitability even in the challenging environment.
There are other encouraging signs. Airline passenger traffic at Las Vegas nearly tripled from May to June, and is almost seven times that of April, showing that the airlines will provide capacity if consumers provide demand.
The overall economy continues to outperform expectations, and the Fed and Congress are intent on providing whatever aid is needed to keep it going. There are longer term concerns, such as the impact on business when the inevitable flattening or decline of economic activity occurs as more jobs and businesses disappear, and then the eventual impact on inflation from all of the debt being piled up.
However, the near-term avoidance of economic catastrophe gives some reason for optimism that those waters can be navigated safely.
Being Bold
Sell-side equity analysts live lives of interesting pressure. On one hand, they’re paid to be right in forecasting how companies and their stocks will perform. On the other hand, it’s safe to not get too far away from consensus and be caught on the wrong side of the market’s view of any particular stock. Thus, even when an analyst does take a contrarian or an especially bullish view, it’s generally done in cautious words and with lots of qualifications.
Thus, it was interesting to see Steve Wieczynski of Stifel reiterate his belief that Caesars (CZR) stock can exceed $100 a share.
A number of Wieczynski’s peers have targets on Caesars in the $40 and $50-plus range, and a few will say it can reach north of $70. That’s the safe way to be bullish. It takes guts to say CZR might reach triple digits in the face of a one-week 25 percent sell-off just after the closing of its purchase by Eldorado Resorts.
Wieczynski’s target on CZR is $60 a share. He thinks planned Las Vegas property sales could be worth $3 to $5 a share, and its sports betting opportunity $8 to $12. But the real blue sky comes in what Wieczynski calls simple math. Mapping out a road to $8.50 a share in free cash flow and giving the typical casino company valuation of 10 to 12 times free cash flow, the stock price is $85 to $102, Wieczynski calculates.
The stock bounced back 12.7 percent to $33.52 in the two days after Wieczynski’s call. Perhaps some of that was because he alerted investors to both the overly done sell-off and to the stock’s potential.
Regardless, Wieczynski deserves credit for being bold.
