We’re at that point where there isn’t much news to move stock prices. We are, barring the unforeseen, marking time until second quarter earnings season begins.
More accurately, we are marking time until third and fourth quarter guidance season begins, as what has happened in the recent past probably sheds less light on the near future than has been true before.
Perhaps the most important bull-bear debate heading into earnings is whether current robust gaming and travel trends are signs of industry strength that should shore up stocks, or whether they are the last gasps of a soon-to-be-exhausted pent-up demand due to be beaten down by inflation and looming recession.
For casino companies generally, one nearly universal trend to look for is one mostly under management control – cost discipline. Are EBITDA margins being maintained as the rebound in business volumes pressures costs, and are casinos spending more to attract customers?
For gaming technology companies, the questions will be whether their casino customers will continue to invest in new slot machines and when they will embrace new technologies such as cashless— is that more of a slow-going evolution or a fast revolution?
Digital is another trend. Some companies, such as Aristocrat, have become big iGaming players. About half of its business now comes from digital. Another company, the former Scientific Games, has shown its path forward in adopting a radically new name, Light & Wonder. How many others have similar digital ambitions?
As for casino operators, look for these trends:
- Las Vegas Strip. The buzz about the Strip has been just that – the buzz. The place is humming. People are jamming properties. Spending is loose and free. Conventions are returning. Glory hallelujah!
But in the “let’s get real” analysis, let’s get real: How are customer bookings longer term? How is expected attendance at conventions and convention-related events, not just the number of conventions booked.
The guess here is that the giddily-busy Strip could be deflated after people have spent their thank-goodness-the-lockdowns-are-over money and tire of nightmarish and excessively expensive air travel.
- Regional gaming revenue growth is already slowing compared to last year and even declining in many states. Now, comparisons could be skewed by going against artificially high spending last year thanks to government Covid relief spending, but declines are declines, and not to be dismissed out of hand.
One place to look for trends is among lower-value players. It’s easy to say all is well if rated players and high-end customers remain strong, but modest players are regional bread and butter, and business erosion will start at the bottom, so that’s a place to look when reading tea leaves for the future.
- Las Vegas locals operators have been riding the waves of free-spending consumers and rapid population growth, especially the influx of affluent people who could be elevating the economics of locals businesses, as suggested by Red Rock Resorts developing high-end amenities at its namesake property.
But there also are signs that the powerful underlying growth dynamics could be about to slow significantly. That housing prices in Las Vegas are growing more rapidly than just about any place in America is not a good sign for a metropolitan area that was built on affordability. And, at some point, the number of disgruntled Californians fleeing to the Silver State may dwindle.
- Macau. For many, Macau is simply a matter of waiting out Covid. But there seems to finally be a lessening of investor confidence that the city will be a casino boomtown again. Maybe it’s just Covid fatigue and all will be well, as management continually claims. But blue-sky predictions probably should be tempered by the experience of recent years and the growth of competition in East Asia.
- Digital. The question here isn’t market growth. That’s a given. It is which companies, if any, show they actually can translate higher revenues into something other than higher losses.
If market share is the long term determining factor of success, then note that FanDuel, DraftKings and Bet MGM have locked in as the leaders, and by a long shot. Caesars and Penn National also have significant shares, with Caesars gaining ground. Beyond those companies, many others are looking like prey come industry consolidation.
- Company-specific developments. Of course, specific companies can rise above general trends, from Monarch Casino benefiting from its Colorado expansion and Churchill Downs building its historical horse racing empire, to regional operators such as Boyd, Red Rock and Golden Entertainment continuing to build free cash flow.
But for those looking at overall trends to guide investment decisions, it will be important in the upcoming earnings season to press managements on any rosy claims.
