A year ago, the world of U.S. regional casino operators wasn’t very exciting.
Oh, there was the usual emphasis on cost reductions, on refining marketing, on tweaking a property here, and planning to convert a riverboat into land-based gaming there. In addition, sports betting was starting to roll out with some promise of future growth.
My, how things have changed.
Today, regional casino companies are rocking. They’re the growth darlings of the gaming industry. While the Las Vegas Strip, Macau and other markets continue to await Covid travel recovery, the regionals are rocking.
Stocks like Penn National, Boyd and Churchill Downs hit highs after highs.
Here are several reasons for the transformation of several regional companies from dull ducks into regal eagles.
- Sports betting is arriving fast, and the numbers are impressive for companies that have already built alliances, such as Penn National with Barstool Sports, and Boyd with Flutter’s Fan Duel, in which it also has a 5 percent stake.
- iGaming is proliferating, too. Again, companies like Boyd, Rush Street Interactive and Golden Nugget Online are showing the potential in this space. Boyd, for one, is stepping up the pace, soon launching its own iGaming brand and reviving a storied name in Stardust iCasino.
- A year ago, CEOs and CFOs a year ago touted improved margins. Now those margins are skyrocketing thanks to Covid-motivated cost-cutting. As examples, Penn National EBITDA margins improved a phenomenal 7.2 percent in the fourth quarter at reopened properties. Boyd grew 5.8 percentage points to a record 33.1 percent.
The impact of these three developments cannot be overstated. Consider New Jersey. In January, iGaming and sports betting revenues combined for $184 million, which exceeded legacy casino revenue of $160 million. iGaming, a more reliable number than sports betting, which is very seasonal, was $103 million. That annualizes to more than $1.2 billion.
In New Jersey, in Pennsylvania, and in just the first 10 days of brand-new Michigan iGaming and sports betting, MGM generated $53 million in revenue, Penn National $47 million, Boyd $35.5 million, Golden Nugget Online $31.5 million and Rush Street Interactive $26 million.
Extrapolate those numbers to all the markets that will be opening and as they mature, and it’s obvious the impact will be significant.
One caution: acquiring online customers isn’t cheap, because those customers are fickle, playing with you today and playing with your competitor tomorrow if he offers a better deal.
That fickleness, however, is where companies like Penn National, Boyd and Caesars have built in advantages—giant customer databases they can mine, and national networks of brick-and-mortar casinos they can cross-market.
Improved margins are less exciting, but important.
No doubt, expenses will grow and margins will decline as casinos fully reopen. But also no doubt, casino companies have learned how to manage at much lower costs.
The impact can be significant. Eric Green, chief investment officer at Penn Capital, noted in his Investor Insights video interview, presented by Fantini Research, that if Golden Entertainment can retain half of its improved margins, EBITDA would grow from an expected $200 million to $250 million. And a $20 stock would generate $4 a share in free cash flow. Assuming a stock can reasonably be expected to sell at 10 times free cash flow, the potential impact is clear. Green’s interview in which he discusses his best investment ideas, can be viewed at https://youtu.be/FEZTdUchmNk.
Finally, margin improvement has a double benefit. It improves the balance sheet. And even if the additional EBITDA isn’t used to pay down debt, the mounting cash reduces net debt ratios.
Caesars CEO Tom Reeg is frequently quoted as saying the new age of online gaming is similar to the opening of the U.S. heartland to casinos during the riverboat expansion of a generation ago.
Interestingly, it’s the beneficiaries of that era—Caesars, Penn National and Boyd among them—that are benefiting from the new gold rush, too.
