FANTINI ’ S FINANCE
Recalibrate and Refocus
Now that gaming growth appears to have slowed , it may be time for a mindset adjustment
BY FRANK FANTINI
As companies report second-quarter earnings , gaming investors will , as usual , be focused on expectations for the balance of the year : Are current business trends strong , and do forward bookings and other data suggest strength will continue ?
Recent history has been : 1 ) yes , business trends continue strong , 2 ) companies continue to maintain big margins as they restrain costs even in the face of inflation and tight labor , and 3 ) balance sheets continue to improve as debt is being reduced in this era of higher interest rates .
But investors might be wise to ask a broader and longer-range question : Has gaming ceased to be a growth industry ?
The fact is few major new markets are left to open . Certainly , there are fill-ins , like satellite casinos in Pennsylvania and new , relatively modest jurisdictions in Nebraska and Virginia , and historical horse racing in odd places such as New Hampshire ’ s charitable gaming halls . These expansions can be meaningful to small companies pursuing the opportunities , but they are inconsequential in the overall world .
There are international opportunities , but , again , with some exceptions , new markets are relatively small and mega projects like MGM Resorts in Osaka or Wynn in the Middle East are years away and might be basically one-offs .
Every bull ’ s favorite international market , Macau , is surely coming back , but only in comparison to pre-Covid 2019 , not to its peak of a decade ago and certainly not to the levels once dreamed of when investors giddily looked at the low penetration levels of mainland China as an extrapolated pie in the sky .
Even the craze over legalized sports betting and iCasino in the U . S . has faded under the realization that player acquisition costs blunt profit potential , and as new jurisdictional openings slow . Further , governments globally are raising taxes and tightening regulations , which threatens profits .
In the near term , casino operators will tout their uber-margins of 40 percent or so . But cost controls , while welcome , do not grow businesses . You can only shut a buffet one time . You can only charge $ 7 for a coffee so often before guests get turned off . You can only cut slot payouts and adopt wallet-squeezing table game odds so much before customers realize their money is gone too quickly and the casino isn ’ t as much fun anymore .
So where does that leave gaming investors ? Two answers : 1 ) finding operators whose growth pipelines still have needle-moving potential , and especially those that reward shareholders with dividends ; and , 2 ) technology and games providers with products that benefit operators financially , whether through higher revenues or lower costs .
Another way to express it is to look for selective growth opportunities .
As noted here before , those are not always the glamor names . They include companies with steady , if not spectacular multibillion-dollar growth plans , such as Boyd Gaming and Churchill Downs .
They include small companies for which even modest projects , such as Full House Resorts ’ latest projects in suburban Chicago and Cripple Creek , Colorado , can be transformational .
They include rock-solid cash flow generators that pay dividends , such as Monarch Casino .
And they include companies true to themselves and riding long-term demographic trends like Red Rock Resorts and Golden Entertainment .
We ’ ve also long been partial to the two gaming REITs , Gaming & Leisure Properties ( GLPI ) and VICI Properties . They have near bulletproof rent collection and the ability to steadily grow revenues while they return substantial dividends to shareholders .
Interestingly , Carlo Santarelli of Deutsche Bank , a sell-side analyst we admire for both his insight and his courage in being willing to stand out from the crowd , has lowered price targets on both as well as downgrading his ratings from buy to hold .
Santarelli still likes the pair ’ s underlying fundamentals , but notes their valuations have become high , the merger and acquisition market has cooled under current economic conditions and provides less of a boost to profitability when deals occur , and that higher interest rates have narrowed the gap between their dividend yields and 10-year bond yields .
On the last note alone , Santarelli points out that if GLPI and VICI return to trading at their normal spread between their dividend yields and the 10-year yield , GLPI stock would sell at $ 35 and VICI at $ 23 . That compares to $ 48.98 and $ 31.83 , respectively , on the day before Santarelli released his report .
No sooner had the ink dried on Santarelli ’ s report than the stocks sold off along with the overall market and , perhaps in part , to his report .
As of this writing , GLPI is trading at $ 47.35 and VICI at $ 30.94 , giving both about a 10 percent appreciation to Santarelli ’ s targets of $ 52 and $ 34 , plus investors get a 6 percent dividend yield on GLPI and 5 percent on VICI .
To boot , they are using their investmentgrade credit ratings to finance tenant expansions that , over time , will lead to higher rental incomes .
So , both still offer profits to investors , and I , for one , continue to buy the REITs on dips . However , Santarelli ’ s point is a good one in an industry where growth has slowed and where VICI , for example , already has acquired the lion ’ s share of property available on the Las Vegas Strip .
The larger point is that it might be time for investors to reappraise the entire gaming investment space . The upcoming earnings season and accompanying investor conference calls will be good starting points in that process .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business AUGUST 2023