FANTINI ’ S FINANCE
Value in Hard Times
A recession can mean opportunity for investors , and some companies remain good bets even in a bad economy
BY FRANK FANTINI
We ’ re a good portion of the way through first quarter earnings season as this is being written .
In normal times , earnings reported to date and management outlooks for the balance of the year would make for a sanguine period . There would be the usual concerns over possible — probable ?— recession as the Fed keeps raising interest rates , and concern about when that shoe will drop on the economy . But investors can calculate that range of impacts versus business trends and be somewhat confident in their views .
However , this moment in time is not normal . There are two events occurring that may make predictions about the relatively near future based on normally reliable business trends moot .
The first of these is occurring in some cases at warp speed : Big regional bank stocks are dropping fast , some crashing . The second is more of a slow erosion as the commercial real estate market weakens because work-at-home and shop-at-home are severely damaging many office markets and shopping malls .
The banking problem appears to be more of a glitch in our regulatory system . We are not prepared to deal with near-instant depositor withdrawals now possible because of online banking . And , while individual banks or regulators can be justifiably faulted , as in the case of Silicon Valley Bank , which started it all , the contagion of depositor fear and ability to act immediately on that fear has begun to seriously affect otherwise solid institutions .
The solution can be quick in coming if regulators and / or Congress act fast , such as restoring FDIC authority to monitor deposits daily . Commercial real estate problems are longer term , and might be a matter of banks and the industry taking their lumps until the new , lower normal level of business is reached .
In the meantime , businesses generally will suffer , including gaming companies , and especially so if all of these forces result in a severe recession .
For long-term investors , this will present opportunity . Gaming REITs , long among our favorites , should continue to collect their rents with far less concern than those focused on other sectors . Their healthy dividends are a guard against rate-shopping that is another factor in many people pulling money out of traditional banking accounts .
Any sell-off in casino stocks is likely an opportunity , too , though a significant downturn can last a long time . The fact is brick-and-mortar gambling companies sell at low valuations yet operate in a business that should always be in demand . Recessions , hard times , shaken consumer confidence all end . The desire for fun and entertainment doesn ’ t .
Loose Ends
• Hail Reeger , or is it Caesar ? Caesars CEO Tom Reeg , perhaps showing a bit of impatience , if not frustration , over the shortterm fixation of gaming analysts , tried to put things in perspective in the company ’ s first-quarter earnings call .
Doing some back-of-the-envelope math , Reeg showed how the company reasonably can reach $ 12.50 a share in fee cash flow in the foreseeable future . That figure is not a stretch , and it compares to a current stock price in the $ 40s , he noted .
Assume , again in back-of-the-envelope spirit , 10 times free cash flow — that would mean a $ 125 stock .
• Favorite new quote . As great an investor as Warren Buffett happens to be , he might be an even better creator of aphorisms .
Buffett , of course , is famous for buying big , high-quality companies and holding on for years , taking the view he is an owner of a business , not a trader in stocks . Buffett began as an acolyte of legendary investor Benjamin Graham who famously said he was a cigar butt investor , buying stocks selling well below book value to get a last puff from them .
But over the years , Buffett has changed from a pure value investor to a growth-and-value investor — much , he says , to the credit of his longtime co-investor , Charlie Munger .
Thus his latest aphorism : Buffett says he has changed from buying fair companies at great prices to buying great companies at fair prices .
Again , to bring this home , who doesn ’ t think that Wynn , Caesars and IGT aren ’ t great companies long-term now selling at fair prices , if not cheaper ?
There are plenty of smaller gaming companies that we ’ ve mentioned in this space numerous times that fit that bill , but to keep this Buffettesque , we ’ ll name just the big ones for now .
• The lion roars again .
MGM Resorts seemed to have lost its mojo for many years after the passing of chief shareholder Kirk Kerkorian and CEO Terri Lanni .
It owned famous names — MGM Grand , City- Center , Bellagio , Mirage — but didn ’ t do much with them to excite customers , and as a consequence , investors , beyond maybe spending too much on projects and in operating properties that were blah compared to their reputations .
Perhaps the best example of MGM during that period was its biggest innovation to lift profits — introducing paid parking in its resorts . It was the bean-counters ’ ultimate victory : diminish customer experience because a cost justification matrix said to .
Since then , leadership has changed . Wall Street firms interested in generating financial returns took control of the board . Bill Hornbuckle , a career gaming guy , was promoted to CEO .
The results have been impressive . MGM is growing profits , reducing debt and share count , and looking forward to a future of growth nearly baked in for years ahead . Indeed , we might add MGM to that list of great companies selling at a fair price .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business JUNE 2023