Second quarter earnings season is about to begin and on the surface it appears it should be fairly sanguine for gaming investors.
The reason is that the most visible evidence of business trends—gaming revenues—have been positive in Las Vegas, across regional markets in the U.S. and in Macau.
That, of course, doesn’t mean that stocks will respond bullishly as investor expectations of strengthening business trends have also lifted share prices. Indeed, stocks could be in for a rocky period if improved earnings don’t match expectations.
However, if casinos are in for a sustained period of meaningful revenue growth, stock prices will follow over time as the accumulated impact of growing earnings has its effect. To use one of Warren Buffett’s phrases: “In the short-term, the stock market is a voting machine. Over time, it is a weighing machine.”
MACAU
Macau is the gaming world’s roller coaster. Several years ago, investors bid up Macau casino stocks to ridiculous highs seeing no end in sight to rocketing growth.
Then came the national Chinese government’s anti-corruption drive and players fled the city and stocks collapsed as investor disillusionment set in.
Now, gaming revenues are growing double-digits again. April rose 16.3 percent, May 23.7 and June accelerated to 25.9 percent.
Projections are for growth this year of 15 percent or more. And much of that growth is anticipated to be in the more profitable mass-market rather than VIP, though that segment has been surprisingly strong, in part because of lucky play for the casinos.
Additionally Macau is developing non-gaming revenues with hotel occupancy rising along with capacity in what could be a virtuous circle.
Further, some long-term support is arriving, or at least nearing: a moderated policy on smoking in casinos, the opening of a new ferry terminal, work preceding on a light rail line, likewise on the bridge connecting Macau to Hong Kong and then to the Mainland.
All of this has fueled optimism. Several analysts see 30 percent EBITDA growth in the second quarter. Long-term, some analysts are again raising the old bulls’ argument that Macau’s penetration of the Chinese Mainland is very tiny. However, we advise caution when trying to extrapolate out nearly unlimited growth based on Mainland penetration.
Still, it’s hard not to be optimistic about Macau right now though, again, stocks in the near term will react on expectations.
UNITED STATES
Regional markets were fairly steady in April and May with revenue growth outside of Nevada of 2.50 and 2.05 percent.
However, June appears to have been a strong month based on states that have reported revenues so far.
Likewise, the Las Vegas Strip was tepid in April and May, declining 3.25 percent in the former and up 2.97 percent in the latter.
The U.S. casino industry has seen this slow and relatively steady growth for several years, and that should continue, as long as the economy holds.
The stories for many casino companies are really their own special situations more than the overall markets. Caesars will implement its reorganization in coming months. Eldorado has to execute on the integration of Isle of Capri properties, and Golden Entertainment, likewise with its American Casino and Entertainment purchase.
One company that has flown under the radar is Tropicana Entertainment. Part of the reason is that there are very few shares to buy given that Carl Icahn owns most of TPCA.
Still, investors willing to go into a situation where they have no control have been rewarded with a stock that has shot up from a 52-week low of $17 to $43.
With flagship Tropicana gaming revenue growth accelerating—up 16.62 percent in April, 14.07 percent in May, and 20.37 percent in June—and with the stock at just over book value, there might be room left to go.
