The first earnings reports are in for the first quarter, and they present two divergent worlds—recovering regional gaming markets in the United States, and the reality of the impact of a declining Macau.
In a way, it’s a poetic justice kind of irony, given how U.S. regional gaming markets have struggled during the same years that Macau raced ahead to become the world’s biggest gaming market.
The two regional companies reporting better than expected earnings were Penn National (PENN) and Pinnacle (PNK). A third, the much smaller Monarch Casino (MCRI), also beat expectations in a company that might represent more of a special situation than a boat being lifted by a rising tide.
The Macau operator was Las Vegas Sands, whose feisty CEO Sheldon Adelson still talks of his commitment to investing ever greater amounts of money in the city while earnings were hit by government policies undercutting casinos.
We’ll see as other operators report, but our suspicion is that PENN, PNK and LVS will prove pretty representative of what to expect from their peers.
PENN and PNK each have their own reasons for performing well.
PENN has its new racinos in Ohio, and soon will own a several-year monopoly on gaming in Massachusetts when its slots casino opens June 24 in Plainridge.
PNK is successfully driving revenue at the Ameristar properties it bought 20 months ago and is enjoying the grow-the-market effect of Golden Nugget opening adjacent to L’Auberge in Lake Charles, Louisiana.
PNK stock is also benefitting by the plan to spin off its real estate into a REIT, and the offer by Gaming and Leisure Properties to be PNK’s REIT vehicle.
Yet another strength for Pinnacle is its free cash flow and dedication to using it to pay down debt. Interest expense, for example, fell $7.5 million from last year’s first quarter. Now PNK says it needs to raise $450 million or less in a stock sale to achieve its reorganization compared to the previous estimate of $700 million.
Those peculiarities aside, both PENN and PNK reported that encouraging business trends are continuing into the second quarter, and play has improved in all customer tiers and in all geographic locations.
Given how widespread PENN and PNK are geographically, we should expect similar good news from other regional operators.
MCRI, as mentioned, is a special situation. It is benefitting from growth in Black Hawk and Reno, but the big story is the transformation of Monarch Casino in Black Hawk into a destination resort. That long-discussed project is drawing near.
Its impact can be considerable. Chad Beynon of Macquarie calculates that a 13 to 14 percent EBITDA return on the Monarch Black Hawk expansion translates into $3.50 a share for a stock trading at just 6.9 times estimated 2016 EBITDA.
In Macau, Las Vegas Sands’ first quarter demonstrated the impact of gaming revenues: EBITDA fell sharply, and even hotel occupancy and rates suffered as competing casinos that comped rooms during boom times are now competing for cash customers.
Adelson did a good job on LVS’ conference call talking resolutely about the company’s commitment to Macau, including the request to add 2,500 non-gaming hotel rooms beyond the 3,000 pending that Parisian’s opening will add.
His prepared remarks sounded like he was trying to impress Macau officials as he vowed to help transform Macau into “the world’s leading business and tourist destination.”
But the reality so far is in Macau government actions—no table games allocated to new resorts, including Galaxy II, which opens just next month.
And LVS, which had hoped to open Parisian this year, is now talking about late next year, yet, as of this writing, there is no further construction labor allocation from Macau to move the project further forward.
The one piece of good news Adelson could report is that the proposal to cap Mainland visitation to Macau at 21 million is the view of just one official and does not represent the government’s view.
And he did suggest that the bottom for gaming revenues might have been reached.
However, until Macau authorizes more table games and loosens up on construction of Cotai casino projects, LVS’ first quarter results could be a harbinger of what the city’s casino operators will achieve for a quite a while.