Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: Year of the Regionals

A good surge at the end of 2015 has continued into this year, so regional casino companies seem to be on the rebound. Whether it’s Penn National, Pinnacle or Boyd, the regionals seem to have the upper hand.

Is this the year of the regional casino operator?

As I have noted before, the revenue trends in regional markets stabilized and then turned up last year.

Though early in the New Year, the trends appear to be continuing, perhaps even accelerating.

Certainly, the numbers reported by various jurisdictions in January have been encouraging, with growth in almost every state. That includes eastern states of Pennsylvania and Maryland, which endured a weekend-killing blizzard this year compared to very mild weather in 2015.

Equity analysts have been cautious to sound the all-clear signal for regional operators, and with understandable reason. It’s been a long climb out of the Great Recession and there are signs that the best of the recovery might be behind, and the economy might even begin to slow.

And, though the Federal Reserve Board will no doubt adopt an accommodative policy at the first signs of a downturn, it does have a rising interest rate policy for now.

Further, most of the decline in oil prices has happened, and there comes a time when falling prices do more harm to the employment picture in oil regions than they help consumers through lower gasoline and heating oil prices.

Still, the positive economic trends remain.

In this environment, Steve Kent of Goldman Sachs has come out to declare his belief that this will be a recovery year for regional casinos.

Kent cites five reasons:

• Casinos will benefit as the economic conditions of lower and middle-income customers improve.

         • Fewer casino openings mean less cannibalization.

         • Already implemented cost controls drive improved margins.

         • Casinos enjoy positive calendar comparisons this year.

         • Scarcity value for investors wanting to participate in the regional resurgence.

         Like many analysts, Kent picks Penn National as his favorite regional casino stock.

PENN has none of the financial overhangs of other companies as its REIT conversion is behind, and has the lowest valuation among the regional operators, Kent said.

Of course, PENN also has the growth opportunities familiar to many investors:

• The opening of the Jamul Indian casino east of San Diego this year, which PENN will manage.

• The expected ramp up of Plainridge slots casino in Massachusetts that has gotten off to a slow start, but which will benefit from a growing player database and PENN being further along on the learning curve in a new market.

• Integrating recently purchased Tropicana Las Vegas into PENN’s database, allowing it to market Las Vegas to the company’s three million customer loyalty club members.

As we have noted before, other regionals also have things to like.

Boyd is enjoying the resurgence of the Las Vegas locals market and the revival of Downtown Las Vegas.

Pinnacle continues to ramp up Ameristar properties, pay down debt and will soon sell its real estate assets to Gaming & Leisure Partners in a deal where shareholders also get to own a piece of GLPI.

Isle of Capri has been hitting its stride and enjoys geographic diversification.

Monarch Casino is benefiting from its Black Hawk renovations and anticipation over its expansion there.

Eldorado is integrating MTR Gaming properties and will soon consolidate its downtown Reno properties with the former MGM properties into one major complex.

Golden Gaming continues its steady tavern and slot route expansion in Nevada, is integrating Rocky Gap casino in Maryland, and is branching its slot route business into new jurisdictions, the first being Montana.

Tiny Full House Resorts should benefit from its now major-league management led by CEO Dan Lee.

Briefly, in addition to the encouraging national gaming trends, each of the publicly traded regional casino companies has an interesting story to tell.

 

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.