FANTINI ’ S FINANCE
No Surprises
Can investors rest easy now that second-quarter earnings were what we all expected ?
By Frank Fantini
Perhaps the biggest surprise in the recent second-quarter earnings report season is that there were nearly no surprises among publicly traded casino operators .
Earnings came in about as expected with a few better than expected . Business for Las Vegas Strip operators boomed , regional casino companies largely met estimates , Macau suffered from well-known Covid travel restrictions . Just about all companies reported trends continuing into the third quarter and sanguine outlooks were universal , albeit with the sop-to generalizations about slight weakening among lower-rated players .
Even the fallen angels of online gaming operators vowed they have found religion and will become profitable , although we still have to wait until next year for proof of conversion and redemption .
In addition , CFOs and CEOs of land-based operators chanted like a Greek chorus the songs of lower debt , share repurchases and free cash flow . All of that was based on their own conversion to the religion of cost controls and the resultant high EBITDA margins .
And if inflation remains and recession descends ? Well , gaming is resilient , the chorus responded .
The sell-side analyst response was largely just as Greek chorus-like . Their hosannas acclaimed the enlightenment of casino operators though some analysts trimmed earnings estimates and target prices , apparently just in case . In fact , there were a couple of instances of raised estimates based on trends and their own analyses , but lowering targets , perhaps to conform to the less bullish outlooks on the economy and consumer spending preached by their firms ’ high priests , aka market strategists .
All of this is a little scary , as in when everyone is in the same boat , it often proves to be the wrong boat .
Yet , as light as I am tempted to make of the situation , I find myself in agreement with the optimists . There surely are risks of recession , but just as surely gamers have proven resilient in the past . And with their greater financial discipline , they should remain resilient on the operating side if hard times come . The improved balance sheets are real . The return to stockholders in the forms of share repurchases and dividends are tangible . Free cash flow generation is not only the new mantra , it ’ s the right metric .
If you ’ re looking for safety and returns , the gaming REITs — VICI Properties and Gaming & Leisure Properties — are as rock-solid as any equities can be . Their proven tenants provide reliable rents . Their significant and growing dividends and prudent growth strategies are supported by track records of excellent execution .
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Gaming companies were thought to sell at lower valuations to account for legislative risk . But casinos are long past those early-era risks . They have now been operating for two decades and more with mostly stable legislative environments . So , it would seem , if a hotel stock sells for 14 times EBITDA , why shouldn ’ t a hotel company with a casino attached sell for at least the same ?
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Use dividends as an example of relative value . The average S & P 500 stock , the classic definition of a blue chip , pays a 1.47 percent dividend . The average real estate investment trust pays a 3.48 percent dividend . VICI yields 4.18 percent and Gaming & Leisure Properties 5.48 percent . Or use multiples of EBITDA as examples . Deutsche Bank analyst Carlo Santarelli estimates the stocks of regional casino operators he covers sell at just 7.5 times this year ’ s enterprise value-to-EBITDA and 7.3 times 2024 projections . Golden Entertainment comes in at just 6.8 times 2024 enterprise value-to-EBITDA with a cash flow yield this year of an outstanding 13.9 percent . Boyd
Gaming and Red Rock Resorts are at 11 percent and 11.3 percent . Interestingly , all three are highly exposed to Las Vegas and the Las Vegas locals market .
The big casino operators look like bargains , too , based on his 2024 EBITDA ratio estimates — 6.7 times for MGM Resorts , 7.8 times for Caesars and 8.2 times for Wynn . Only Las Vegas Sands , which has forsaken Las Vegas to be a Macau-Singapore operator , is in double digits at 10.2 times 2024 projections .
It also goes without saying that gaming companies have lower valuations than companies in other travel and entertainment industries . Again , using Santarelli ’ s calculations , stocks of major hotel companies he covers sell at 14 times this year ’ s EBITDA and 13.3 times 2024 .
This undervaluation of gaming companies compared to those in sister industries is not new . It is common for casino companies , especially those in regional markets , to sell at seven and eight times EBITDA while sister-industry stocks sell at 12 and 14 times .
Initially , gaming companies were thought to sell at lower valuations to account for legislative risk . But casinos are long past those early-era risks . They have now been operating for two decades and more with mostly stable legislative environments . So , it would seem , if a hotel stock sells for 14 times EBITDA , why shouldn ’ t a hotel company with a casino attached sell for at least the same ?
Obviously , this is an oversimplification , but it does suggest a safety in the casino business model that should result in higher than single-digit EBITDA multiples . It also explains some of the motivation in selling casino properties to VICI and Gaming and Leisure Properties , unlocking that value and getting big cash payments to reduce debt and freeing up cash flow in return for becoming renters .
Bottom line : From the gentle Greek chorus parody at the start of this column to the examples of relative undervaluations at this end , the conclusion is the same — well-run casino companies should be good bets in these uncertain economic times .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
14 Global Gaming Business SEPTEMBER 2022