“Adapt the pace of nature: the secret is patience….”
Ralph Waldo Emerson
There is much to be said in dumping masses of data points, fancy metrics, technical analysis and digestion of macro events in any attempt to review the performance of the gaming stock sector year to date. Unquestionably the more info and educated thinking investors can bring into their decisions the better. Yet we think it sometimes reaches the TMI syndrome (Too Much Information) where the plethora of data and recommendations from both buy and sell side analysis begins to resemble a Greek Chorus on the sidelines echoing the same sentiments about the cast on stage.
The result: Choral chanting is fine but can distract investor attention from the real show going on at center stage. There are many valuable metrics to take the temperature of stocks without question. But from our perspective, gaming is a bit of an outlier and always has been. Its one part gambling, one part hotel, another part food and beverage, still another part entertainment, yet another element is shopping and still another part socialization. Above all its consumers share a state of suspended disbelief unlike any other business:
You arrive at a gaming establishment expecting to lose, but hoping to win. The clay compsition $100 chip you buy loaded with RFID tech features, may cost the casino anywhere from 45c to $1 for the standard 9.5 to 10 gram coin. Just think what magic amulets these chips are. You pay the casino a hundred bucks and you get a product that costs them 45c to $1. Not bad considering that customers arrive with the expectation that they are likely to leave a bit poorer. So no matter how many sector euphemisms like leisure or consumer discretionary have imposed on the business over time, the business is about northing more than selling magic amulets that cost under a buck for which customers pay $100.
The valuations of companies in the business all pivot off this factor: That there is a hefty percentage of the adult population in which the casino operates, that believes in the magic amulets. And the degree to which the operator can build as much entertainment value into the gambling experience and still make tons of money is what separates the winners from the also rans.
There are as noted above many metrics out there, most of which originated in the hotel business decades ago, that measure performance and by that, prompt movements in the stocks over time. In casinos EV/EBITDA is the gold standard above all else. Yet, in my view all metrics in the sector tumble into one single measure that best reflects market sentiment about a gaming stock: its 52 week trading range.
My reasoning is simple: Over a year to date the headwinds and tailwinds that buffer a gaming stock are a far more complex mix of micro and macro events than they are for nearly any other sector studied. The volatility rests on a simple reality: No other business is legally compelled to see its monthly gaming results published by states or governments. The grosses of movies widely publicized do not provide tell tale trails to profitability. Nor can any operator escape evidence of its efficiency or lack of same: its share of market by month, by week, by day, is public knowledge. Knee jerk reactions to monthly numbers by observers of the sector are inescapable: investors in the sector either accept high betas as coming with the territory, or are better advised to put their money elsewhere.
This is why when we began our review of where the sector sits at approximately the halfway mark in the calendar year, we faced a mass of data review that navigates through tons of overheated forecasts and warnings. There are macro events that have zero impact and earnings calls that feature CEO’s bursting with happy talk that often disguises management failings. We also get lots of good stuff to sift through that all too often is buried by fears among some analysts about getting overly bullish about a given gaming stock.
So just as in the casino business when time at the table or slot machine tells the ultimate tale of value of a given gambler, we think the behavior of a gaming stock is best noted in a long time frame during which both good and bad news breaks, is absorbed and we separate those sheep investors who follow the conventional wisdom, from those who have a deeper insight into opportunities to buy, sell, hold or accumulate. We all have faith in someone’s crystal ball.
That metric is the 52 week trading range. Its imperfect, its got its flaws, but to us, it is one of the most durable reflections of how the market sees a stock and acts on it. It results in a backward look that provides a viable prologue to the trading future ahead.
The 52 week trading range: Our basket of gaming selected gaming stocks, is the past prologue?
What follows is a straightforward review of the 52 week trading range of a basket of gaming stocks we follow among others. It is selected to be representative of four subsectors: Las Vegas/Nevada, US Regional Casino stocks, Macau and Asia and online/tech real money wagering stocks. It is in our view, the report card or if you will, the rap sheet of the companies as viewed by the market. It results from a blend of conventional wisdom choruses, events, coups and fumbles, even weather and for sure, random luck in given quarters. Based on the 52 week trading ranges shown here and the price at this writing, we share our sense the forward momentum: entry point, hold or sell.
Stipulations: We have been bullish on most of the stocks the sector in general. The 52 week trading range is noted after the ticker shown and our capsule take on a going forward performance. Also note, per usual, our calls on these stocks are mostly based on our industry-centric viewpoint, contact network in the business and on the ground appraisals of management performance.
The Stars Group (NASDAQ: TSG) $15.85-$38.95
Price at writing: $37.20. Though it has fallen slightly back from its high, we still like the stock to move smartly north based on its forward earnings profile, savvy management, and catalyst in the US Supreme Court’s PASPA decision giving the nod to sports betting.
We’re calling it a buy.
Churchill Downs Inc: (NASDAQ:CHDN) $185.20-$314.60
Price at writing: $299. Despite this hefty 52 week upside we have not been fans of this stock. As we’ve often noted on SA, this is a nice company, with decent management that thinks more like a hedge fund than a gaming operator. We think it is wildly overvalued given the fact that near 70% of its revenues base in rooted in legacy businesses, like live horse racing, which are demographically challenged. Its casino sectors are so so, its online wagering site. Twin Spires, is the real winner in its portfolio. Had the stock a larger outstanding, less institutional ownership dominance and a price under $100 a share we’d be fans. Our take: There are better places in the sector to put your money long range.
Penn National Gaming: (NASDAQ:PENN) $19.96-$36.90
Price at writing: $34.43. A US regional gaming stalwart with foots both in integrated resorts and racinos. More acquisitions to come, sports betting at their racinos a plus. The downside: many properties in states with no or low growth gaming win trends. Management: Effective, but a bit belt and suspenders.. Realty spun off and owned by the Gaming & Leisure Properties Inc, (NASDAQ:GLPI). Slightly off its high, but not enough. We see an entry point if it ticks below $29.
Boyd Gaming Corporation. (NYSE:BYD) $24.53 -$40.44
Price at writing: $37.64. This US regional operator has a fine balance between geography outside Nevada, and a powerhouse position in the Las Vegas locals market which has recently outperformed the strip in y/y gaming growth showing it over 7% vs. 2.88% on the strip. Strongly positioned to acquire as segment consolidates. Management team: Superior to most peers in terms of timing entries and exits in markets, long heritage of customer savvy, sound financial management. Off its recent high we think it’s a buy at its current price with a PT of $47.50 by the end of this year.
MGM Resorts International (NYSE:MGM) $27.88-$38.41
Price at writing: $30.77. The company has the widest footprint of any operator in the space with a dominant presence in Las Vegas, regional properties sprinkled through the northeast, Midwest and south and of course, two Macau integrated resorts. In addition it has been among the most aggressive marketers in the sports betting space in NJ from before the landmark decision of the Supreme Court. It can be considered a mainstream contender for one of the three Japanese IR licenses to be issued by late next year. Our concerns: We think its beginning to get spread too thin, building up long term debt, sitting on pipeline projects like Springfield, Massachusetts that face new fighting brand slot parlors across the Connecticut border. They may be overinvested in Las Vegas given the maturity of that market and the new supply coming from Resorts World (Genting) and Wynn by 2020. Positives: Its National Harbor in Maryland is a superb property and will exceed expectations.
We had reservations but at its price at writing, we like the stock to move to a PT back around $36. Its tempting to overweight, but to us, a modest add to a gaming portfolio now makes more sense.
Las Vegas Sands (NYSE:LVS) $59.16-$81.45
Price at writing: $74.50. Our outight favorite for a great runway through to 2Q19. This of course is largely a Macau story. A China market of incalculable depth, an operating philosophy that produces excellent margins, no current pipeline to tamp down FCF. I see cascades of cash going forward. Singapore rolls along, Las Vegas does fine enough. LVS occupies the best pole position in our view for success in getting one of the three Japanese IR licenses. And if it does, its cash hoard will be so huge as to comfortably absorb anywhere from a $6.5bn to $10bn IR development. If the Japanese mandate a piece of local ownership, across a spread from 20 to say40%, LVS will be positioned to give up as little as possible.
Management: With CEO Adelson at 84, succession planning is still invisible and needs to be addressed. Bench strength is solid and is very much a product of Adelson philosophy and stress on operational efficiencies.
Our take: Off its high by over $6, and way below our internal metrics PT of $100 by 2Q19 or before, we think LVS at its current trade is beyond a buy but almost—repeat—almost, borders on a steal. The stock has its critics. But its earnings profile, its dividend payout and Japan prospects are a great story for a buy here now.
Wynn Resorts Ltd. (NASDAQ:WYNN) $124.11 to $203.63
Price at writing: $165. This company has weathered more massive headwinds this year than anyone else in the sector. The fallout from the Wynn sexual misbehavior revelations and resignation were huge without question. Bears continue to nag at the idea that the company could be forced to sell its blockbuster to come: Wynn Boston, due to the bad politically incorrect optics of the Steve Wynn problem. His ex-wife continues to roil the waters as a gadfly with the remaining largest single piece of the company. The built 20% premium in the trade historically based on the sheer presence of Wynn himself is gone.
But the pipeline in Vegas and Boston will go on to completion. Our best take now: No forced sale. Performance in Macau remains outstanding. New investment there will be highly accretive to Wynn Macau. Management: Maddox has acted quickly to settle legal issues, restructure the board and reposition development projects. High marks there. We continue to believe the locked in value of across the board product superiority will win the day. As the headwinds fade we see a great runway to our PT, which remains unchanged at $225 a share by 2Q19 or before.
El Dorado Resorts,Inc. (NASDAQ: ERI) $19.80–$46.85
Price at writing: $43.55. I have been a long time fan of this company and its management going to way back in the day when they were a Reno based family gaming operation. They are poised at the cusp of US regional consolidation having the gut level instincts to recognize value and acquire an expanding footprint at the right price. Watch for them to scoop up small regional players next year. Management: Superior grasp of marketing to mass slot and table game customers accumulated over decades is part of Carano family DNA and its real.
Put simply, they know what it takes to make money in gaming without selling the family jewels. I’m looking at roughly a $55 stock coming into 1Q19 based on forward earnings to some extent, but more so into their ability to efficiently absorb what they’ve bought and go on to farther expansion.
Caesars Entertainment Corporation (NASDAQ:CZR) $10.25-$14.25. Price at writing: $11.70. My alma mater. A once great company leveled by bad decisions into its 2015 bankruptcy filing. Its new management has been a reasonable, realistic steward since its exit. It has slashed costs, improved its properties with over $500m in room renovations that has resulted in higher REVPARs. Its flagship Caesars Palace remains a global icon in a great four corners location. It has a bit of a head start in online casino and sports betting but is under performing its NJ peers. It has dipped a toe into a South Korea IR with a $775m investment. Long overdue appearance in Asia for a name with great brand recognition there.
Core dilemma: What is the new Caesars? It has too many properties in too many jurisdictions that need to be either spun off or sold. The giant Total Rewards program that navigates customers from one CZR property to another is great but is staling out. Far too many peer competitors share a similar customer base in the same markets. Thinning down the portfolio and adding nicely to its present cash pile makes great sense. There just isn’t room for both a massive MGM and CZR in the regional space as others consolidate and become sharp elbowed competitors. Our take: It’s a pass even at an attractive price until management clarifies who and what the company expects to be.
Scientific Games Corp. (NASDAQ:SGMS) $33/70=$62.80
Price at writing: $49.30. We hate the debt load, but love the positioning of the company since the PASPA decision. Two big plusses as catalysts: One, the acquisition of NYX, and its super tech platforms in sports betting ready for prime time bidding for contracts in states where SGMS already has a long standing relationship with lottery officials supplying instant scratch off tickets. The price, way off the highs, will need the encouragement of at least the first successful bid win to really move. Our take: If you own it, hold it, if not put it on your watch list at least over the next 4 months as many states begin to stop sleep walking on sports betting and move legislation.
International Gaming Technology (NYSE:IGT)
$18.89–$31. Price at writing: $24.79. Two headwinds have pummeled the stock. One, lots of rumbling in Italy where the company headquarters and owns a big market chunk about re-orienting the lottery regulations. Two, heavy debt incurred over time when the company went acquisition crazy. But its tech smarts are good, its gaming machine business fairly stable its gaming monitoring system technology first class. IGT’s state wide contact network in lotteries likewise figures bullish in their future in sports betting. I’m calling it a hold for the same reason as SGMS: waiting for the first sports betting shoe to drop into their coffers. At that point the stock can take off big time primarily because they have what potentially could be the biggest canvas in partnering with its casino customers in that space.
The bottom line: The gaming sector has done well over the 52 week ranges here. In selected cases we think many still have gas in the tank to move ahead while others may be at best a hold. Understandably, some investors may wish to take money off the table now assuming they’ve ridden the 52 week wave and made money. Others may agree that some of these stocks have lots of runway left. Its gut check time for still others who have stuck fast on some of these stocks after being killed on the China tariff scare. Overall, we conclude thus: We like the general tone of the sector between now and the end of the year. We’ll revisit again as events unfold. As the Emerson quote above instructs: Patience never loses.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.