It is safe to say that if the Fed continues raising rates and scaring off investors and a recession ensues , you can say goodbye to all the sanguine talk about consumers continuing to spend .
FANTINI ’ S FINANCE
Opportunities and Challenges
Two diametrically opposed realities confronted casino operators in the third quarter
By Frank Fantini
Two themes dominated company comments during the third-quarter earnings report season :
1 . Business at casinos is strong and older players , international players and conventions are returning , all boding well for the near-term future .
2 . Inflation is starting to have its effects driving up the cost of food and utilities and other expenses , chipping away at the big EBITDA margins that casino companies have so proudly achieved .
Related to those are that games and technology companies continue to enjoy strong support from casino operators , are benefiting from strengthening of their balance sheets and are seeing improvements in supply chains .
However , hovering over these conflicting trends is a Federal Reserve Board of Governors determined to put the brakes on inflation even at the cost of recession .
Casino companies have considerable underlying strengths . They have cut costs . Balance sheets have been strengthened and will be strengthened further . There is plenty of room for revenue growth , whether through existing operations or geographic or physical plant expansions .
But for the foreseeable future , there remains that risk of a Fed-induced recession to worry investors . And the worry is setting in . Even though stocks ran up fast and far after the latest inflation reports showed modest improvements in trends , both absolute stock prices and valuations are below levels . Whether we are in a bear market punctuated by rallies or whether the worst is behind and it ’ s upwards from here are arguments for bulls and bears . But the reality is that stock prices as of this writing are still double-digits below their highs .
Regardless of short-term market moves , it is safe to say that if the Fed continues raising rates and scaring off investors and a recession ensues , you can say goodbye to all the sanguine talk about consumers continuing to spend . They won ’ t . Even without recession , there is mounting evidence that the cash hordes consumers built with Covid relief money are finally nearing depletion and will not be there to finance gambling jaunts .
Sprinkle in higher prices and less discretionary income and the outlook for entertainment companies dims into a world of stagflation . Go past stagflation to full recession and the result for consumer discretionary companies is the same .
And weaker economic conditions will bring lower earnings followed , of course , by lower stock prices likely compounded by tumbling valuations .
If that scenario comes to pass it will spell for long-term investors two enticing words : buying opportunity .
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It is safe to say that if the Fed continues raising rates and scaring off investors and a recession ensues , you can say goodbye to all the sanguine talk about consumers continuing to spend .
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The underlying strengths of today ’ s casino companies and their still-to-fulfill business opportunities will remain regardless of inflation , recession or bear markets .
And if history repeats , the road back to higher stock prices will begin before the economy recovers , so any investors waiting for the all-clear signal will miss the big upturn .
In short , now and the near future should be good times for long-term gaming investors to be buyers .
Supplying Optimism Casino companies make the headlines in the financial press . Everyone can visualize the main floor of a casino , a table game pit , the crowds and bright lights of the Las Vegas Strip .
But the real story of gaming in 2022 might be the health and prospects of the supplier companies .
Everyone , it seems , had a positive tale to tell in their third-quarter announcements .
Big players from IGT to little guys like AGS beat expectations . Companies such as Light & Wonder could finally say debt ratios are under control . They and Aristocrat could point to continuing improvement in their business fundamentals . Everi and Inspired Entertainment continued to develop in ways that promise to deliver impressive compounded profitable growth , each with its own special kicker , cashless gaming for Everi and virtual sports for Inspired . All are growing their digital businesses as they develop from casino suppliers into cross-platform games providers .
So , while casinos and sports betting companies grab the attention , investors might do well to look at the engines under the industry ’ s hood that make it all go .
Now , Macau Readers of this space are accustomed to my warnings about investing in Macau casino operators . And , for those keeping score , my bearish stance has proven correct , big time .
But conditions change , and now is the time to consider buying the stocks , and especially those of the U . S . listed companies — Las Vegas Sands , Melco Entertainment , MGM Resorts and Wynn .
Macau casinos may never return to the revenue levels of several years ago . In fact , I doubt that they will , given the Chinese Communist Party ’ s antipathy towards gambling .
But the national Chinese government also is not about to crush Macau ’ s economy and , for the foreseeable future , that economy depends on the health of its casino industry .
Travel will soon resume to Macau from mainland China and revenues should grow substantially over the next year , taking stock prices with them . That should present a significant trading opportunity . Note , I said trading opportunity , not investment opportunity . Those believing the long-term bullish story for Macau gambling risk being burned by that Communist antipathy .
Of course , this depends on one big caveat — the renewal of gaming concessions . We ’ ll know the answer to that soon enough , with current betting that they will be renewed .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business DECEMBER 2022