Somehow, with no warning, American policymakers turned on a dime.
Just a few days ago, governors and health care officials screamed against even the hint of the idea that the economy start to reopen.
Then, even as the air still filled with attacks on Georgia Governor Brian Kemp for taking the lead, lockdown advocates from Governor Phil Murphy on the Atlantic to Governor Gavin Newsome on the Pacific began to follow—albeit couched in the phraseology of science and data caveats.
At the same time, two other phenomena occurred:
- The stock market soared on reopening optimism with the horribly beaten down gamers rebounding more than most.
- Almost overnight a consensus formed that when casinos reopen it will be at low capacity and with strict health-safety protocols.
There is also a consensus that locals casinos will recover sooner than destination resorts for which air travel, international visitation and convention business are big parts of their business models.
Beyond that, there is a lot of wide-ranging speculation.
One can expect that casinos will focus on bringing back their best customers. One lesson from the Great Recession was that it pays casinos to market to their best customers and not waste money on low-value customers. That will be even more true when operating at 25 or 50 percent capacity. Say goodbye to the $5 blackjack table.
Still, only so much revenue can be generated at low capacity and only so much can be saved on marketing. As banking entrepreneur Vernon Hill used to say, you can’t cost-save your way to prosperity.
But what can be accomplished in the more subdued environment sure to come is a bridge to prosperity, whether that be next year or, as is increasingly believed, in 2022 or even beyond.
That will change the focus for investors. For several weeks, the question has been cash burn and liquidity – how long can companies survive being shut down.
Now, the question will be whether companies can get cash flow positive. Boyd Gaming CFO Josh Hirsberg offered hope on that point in his company’s first quarter investor call.
Citing the lower expense structure upon reopening, Hirsberg said “it doesn’t take much to be cash flow positive. And… you can bet we will be very focused on… running the businesses to… get there as quickly as possible.
As companies get even modestly cash flow positive, it will change investors’ analyses to the longer-term.
And what is true for casino companies should be true for gaming suppliers as money begins to flow in from participation leases and, in the case of IGT and Scientific Games, from revived lottery sales.
As after any crisis, the landscape will have changed and will have created opportunities. The trends towards legalizing online gaming should accelerate, especially as the continuing legalization of sports betting is opening that door.
Early first quarter earnings announcements provided evidence of what was widely expected – house-bound gamblers migrated to digital gaming. That, in turn, should make online gaming companies more interesting to equity investors.
Companies heavily into social gaming may get an additional boost, a benefit to Aristocrat and to SciPlay and its 80 percent owner, Scientific Games.
Mergers and acquisitions in the brick-and-mortar world should also accelerate, maybe not so much resuming the trends of REIT-facilitated purchases at higher valuations that were such a trend in the past year. More likely, the strong survivors able to pick up some COVID-weakened casino operators, and in cases with REITs facilitating.
All of this suggests opportunities for equity investors. A couple of weeks ago, gaming stocks had become so cheap that there were many no-brainer buying opportunities.
The big rebound since then has eliminated those, and with so much uncertainty over how big and how long industry recovery will take, many stocks may be priced closer to right.
Against all of this is the background of the overall economy. Knocked down hard, will it bounce back quickly or take considerable time to recover?
All of this is a way of saying the time for fundamental analysis is back.
