FANTINI’S FINANCE: Making the Cut

Long-awaited interest rate cuts from the Fed may finally start to come to fruition here soon. That would have a big impact on everything from investment to debt restructuring, and gamers could be among the biggest winners.

FANTINI’S FINANCE: Making the Cut

It is widely expected that the Federal Reserve Board will begin lowering interest rates next week in what should be the first in a series of cuts, though how big and how many cuts there should or will be is the subject of debate.

However it plays out, rate cuts should benefit stocks of gaming companies, especially those of casino operators, which historically have relied on a fair amount of debt to fund growth.

However, rate cuts might not have as much impact as historically would have been the case, as many casino companies have cleaned up their balance sheets by lowering debt ratios, extending maturities, converting variable interest debt to fixed rates and cutting the amount of debt.

Still, there will be benefits, including to all those that have variable rate debt.

Deutsche Bank equity analyst Carlo Santarelli recently calculated the increase in free cash flow from lower rates on companies he covers that have floating rate debt.

Assuming a 1.5 percentage point reduction, here are the five biggest beneficiaries among companies he covers in terms of increased discretionary free cash flow:

Golden Entertainment           7.3 percent

Caesars                                  6.5

Light & Wonder                     5.8

Red Rock Resorts                  5.4

PENN Entertainment            5.3

In addition, companies with maturing debt should be able to refinance at lower rates in a number of cases.

Lower interest rates will also encourage growth as borrowing becomes more affordable for property acquisitions, expansions and renovations, and in new technology and products.

Indeed, the recent softening of interest rates has already brought life to REIT stocks, and that the two gaming REITs, VICI Properties and Gaming and Leisure Properties, have been hitting 52-week highs isn’t just coincidence.

In addition to the advantages lower rates offer in their efforts to make acquisitions and finance tenant growth, their dividends become more appealing compared to bonds. VICI’s dividend yield is 5.1 percent and Gaming and Leisure’s is 5.8 percent. Combine that with stock appreciation and total return is very attractive, especially to institutional investors and income investors.

Another big industry impact should be in mergers and acquisitions and IPOs.

There are a lot of potential acquisitions out there that make strategic sense, whether private casino owners sell to public buyers or small suppliers be purchased by larger competitors.

Some gaming industry segments are especially ripe for consolidation, such as sports betting and iGaming. Indeed, some small deals are being done already as foreign companies sell off U.S. assets and beat their ways back across the oceans; or, as companies fill niches, such as Evolution buying table game supplier Galaxy Gaming.

IPO candidates include a number of private companies whose owners have been biding their time waiting on better prices, which lower interest rates should help make feasible.

Except for fire sales, deals are done at prices agreeable to both sellers and buyers. And as with IPOs, many prospective sellers have patiently waited on better prices while buyers have waited on lower financing costs

Lower interest rates should help on both sides of the deal and, in the process, may help raise valuations generally as stock investors see what companies are worth to buyers and feel motivated to pay higher prices for stocks.

In short, we may soon enter a period where prices of gaming stocks finally rise closer to their true values.

Articles by Author: Frank Fantini

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

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