With nearly a full quarter of experience in hand and fourth-quarter earnings season complete, now is a good time to check in on some interesting trends.
- Forget about last year and next year. Thanks to Covid-19, and maybe the pressure on analysts to justify high target prices, we aren’t comparing financial results to last year or valuing companies on next year’s forecasts.
Instead, historic comparisons now come against 2019, the last normal year, and valuations are often based on 2023, which some might suspect will be the next fully normal year, though 2022 strikes me as sufficient.
- As for digital, what the heck? Let’s value companies at 30 times revenue or 60 times EBITDA five years out.
- There ain’t no such thing as bad news. Profits fall? Guidance abandoned or lowered? No problem. Stock prices rise as investing in many companies becomes more a leap of faith than a mathematical calculation.
- Margins, margins and more margins. The reason for so many US casino operators to report higher profits on lower revenues is their serious cost cutting and the belief they can maintain cost discipline even as business volumes return to normal.
Perhaps the starkest example of this phenomenon at work was presented by Golden Entertainment, which fell somewhat short of fourth quarter expectations. CFO Charles Protell gave a simple illustration to investors on the company’s investor call: Retain five percentage points of the margin improvement on $600 million in casino revenue to generate $30 million in free cash flow and, on 28 million shares, that’s better than a dollar a share in free cash flow.
The next day, analysts produced big jumps in their target prices and the stock shot up over 15 percent over the next several trading sessions.
- Market share or profitability. Take your pick. Investors have two nearly opposite choices in the proliferating world of online sports betting and iGaming.
On one side are the big operators grabbing 25, 30, even 40 percent and more market share—FanDuel, DraftKings, BetMGM, Barstool and to a lesser extent so far, William Hill. These operators, or so the theory goes, will be the survivors once the industry matures and consolidates and then they will make tons of money.
On the other side are the smaller operators who say that, rather than spend wildly to buy market share, they will focus on profitability – Rush Street Interactive, Golden Nugget Online, Churchill Downs, Score Media.
We tend to lean toward those that emphasize profitability, though none are profitable yet as even they have to make upfront investments in all of the new markets. We would add Caesars to this list. While a large company that is about to get larger with the acquisition of William Hill, CEO Tom Reeg is laser focused on profitability.
- How REIT they are. The one unquestionable winner in brick-and-mortar gaming during Covid has been the three REITs: Gaming and Leisure Properties, VICI Properties and MGM Growth Properties.
Pre-Covid, many REIT investors preferred companies with diverse tenants. But as shopping malls and office buildings got slammed by the pandemic, casinos kept paying rents steadily and reliably.
Now, the gaming REITs have not only proven themselves in a stressful time, they’re all in position to continue growing their portfolios, rents and, importantly to investors, their dividends.
- We’re all grown-up now. The addition of Caesars and Penn National to the S&P 500 was a well-earned achievement by two companies of modest beginnings—Caesars from Bill Harrah’s Bingo Hall and Don Carano’s Eldorado hotel, both in Reno, and Penn National from a single minor league racetrack outside Harrisburg, Pennsylvania.
But it’s also a tribute to the growth of the U.S. casino industry. Caesars and PENN join Las Vegas Sands, Wynn Resorts and MGM Resorts in listing among America’s blue chips.
Given the small size of the gaming industry that’s pretty good representation.
