FANTINI ’ S FINANCE
Highs and Lows
Looking for bright spots in undervalued casino stocks
BY FRANK FANTINI
The second-quarter earnings report season is about complete as this is being written , and the biggest surprise may be that there were so few surprises .
Las Vegas continues to forge ahead while the regional markets remain blah . Churchill Downs , Red Rock Resorts and Light & Wonder keep hitting the cover off the ball . The gaming REITs remain solid . Most digital and sports betting companies continue to fall short of their hope and hype . Macau gaming continues to recover while its stocks don ’ t .
If there are themes , they make faint impressions rather than deep grooves . Balance sheets continue to gradually improve as companies find limited use for their resources other than paying down debt and , to greater or lesser degrees , buying back shares . The first cycle of labor cost increases that hit unionized Las Vegas casinos is about to anniversary , relieving pressure on profit margins . Stock prices remain depressed , giving way to some of the valuation anomalies noted below .
One of the hopeful signs for equity investors is that the merger and acquisition market appears to be loosening , as witness the deals for Bally ’ s , AGS , IGT and Everi , and Galaxy Gaming . And , with the expectation that interest rates will decline later this year , more deals could come . Even the moribund IPO market may awaken from its slumber . There certainly are enough privately owned small gaming supplier companies that could be purchased or go public .
If merger and acquisition and IPO markets do awaken , that could be the tide that lifts valuations generally , at least somewhat .
Otherwise , unless something happens to jar the stock market or dramatically change investor sentiment or industry outlook , it appears that gaming stocks , generally , will continue to muddle along .
Meanwhile , the conference calls where executives commented on the quarter just past and the outlook for the balance of the year offered some entertaining moments , if not course-altering revelations .
Here are some highlights , and maybe a lowlight or two .
• Formula Freakin ’ 1 just can ’ t stop being controversial . MGM Resorts CEO Bill Hornbuckle started a minor kerfuffle among investors when he said that advanced sales for this year ’ s Formula 1 race are falling short .
Things settled down a bit after Wynn Resorts CEO Craig Billings said bookings for the event appear to be coming along just fine .
The reality is that both MGM and Wynn , and surely the whole of the Las Vegas Strip , are bigger than one event , no matter how big it happens to be , so investors who sold off stock in reaction to Hornbuckle ’ s comment probably should just chill out .
Penn Entertainment can make a good case for winning the Undervalued Stock Cup as its shares continue to sell for well less than the value of its brick-and-mortar casino business alone .
• Gutsy or stupid move ( to be proven either way ): DraftKings considering a surcharge on bets in high-tax online sports betting states . On the surface , this sounds like a great way to penalize your customers because of their politicians ’ decisions , and of the company ’ s own decision to be in those markets , not to mention it may help drive players to competitors at the same time that DraftKings is losing money competing for players .
Then again , maybe a surcharge would be the source of revenue that makes a much-needed positive difference .
• Psst . Wanna buy some real estate ? Here ’ s a commentary that helps sum up the valuation malaise for gamers .
Golden Entertainment CEO Blake Sartini pointed out that valuations have become so low that the company ’ s stock is worth less than its real estate .
Of course , it would help if Golden found a growth path . It ’ s tried enough different things over the years , none of which panned out . Maybe its current value play tactics — decent dividend and hefty share repurchases — will help until a successful strategy is found and achieved .
• Whaddya mean , you ’ re undervalued ? Then again , Penn Entertainment can make a good case for winning the Undervalued Stock Cup as its shares continue to sell for well less than the value of its brick-and-mortar casino business alone . That is because investors give its online operations a black eye for the very same kinds of losses that cause them to give bouquets to DraftKings . Of course , Penn can just dream on DraftKings ’ market share .
• Us , too . Inspired Entertainment CEO Lorne Weil called his stock ’ s valuation laughable . The result : investors bid up the stock 7.75 percent on the day financial results once again fell short . ( To be fair , INSE does have an intriguing story with its virtual sports and hybrid live-dealer online table games that will start to play out — or not — in coming quarters .)
( Hint , if you notice a trend here , it might be that gaming stocks of all kinds are way undervalued .)
• Quote of the quarter : Gaming and Leisure Properties CEO Peter Carlino in answer to a question on whether the busy company ’ s plate is getting crowded : “ Then we ’ ll get a bigger plate .”
• Quote of the quarter II : Penn National CEO Jay Snowden laying it down for all the doubters of his online strategy : “ We want to be America ’ s sportsbook .”
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business SEPTEMBER 2024