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Alphabet Soup

What will the recovery look like—if there is a recovery—after the lockdown is over?

Alphabet Soup

Other than a manic-depressive stock market that seems to overreact to every shred of news on the outlook for Covid-19, there is surprising consensus about how to reopen the American economy and, pertinent to this column, the gaming industry.

It seems as though policy makers turned on a dime. Even the most ardent advocates of lockdown, such as New Jersey Governor Phil Murphy on the Atlantic coast and California Governor Gavin Newsom on the Pacific coast have begun to allow a loosening of shelter-in-place, albeit more slowly and couched in the phraseology of science and data caveats.

For casinos, the outline is clear, specific and now familiar: maintain social distancing, check for fever among employees and customers, keep crowded venues such as nightclubs closed, and sanitize, sanitize, sanitize.

Maintaining social distance will require dramatically reduced capacity. At best, every other slot machine will be closed, half or more seats will be removed from gaming tables, and there will be limited seating in amenities such as restaurants—50 percent, maybe 25 percent, and so on.

That reduced capacity raises the question of how financially viable casino operations can be.

But before deciding that, we’ll have to see what kind of recovery the economy experiences.

So far, the possible outcomes are an alphabet soup.

Some favor a V, meaning bouncing back as quickly as we fell.

Others expect a U meaning a longer time at the bottom before recovery.

Bears choose an L, meaning flat after hitting bottom.

Perhaps most feared of all is the W: bouncing back quickly from the bottom, then falling very quickly again. Anyone expecting an autumn resurgence of Covid-19 could fall into this camp, though it may be more likely a lopsided W, tilted toward a lower second dip and something economically like the Great Depression.

We’d like to be advocates of the V, but that seems an unlikely scenario.

Even when casinos are allowed to throw open their doors, it seems unrealistic to expect a rush of pent-up demand. Public opinion surveys show that somewhere between 40 percent and 60 percent of Americans will not travel or patronize crowded venues. So, while there may be a lot of restless casino customers eager to return, and while casino executives report that conventions and events canceled this year are rescheduling, it seems safe to say customer counts will be down for a while. That may be especially true in Las Vegas, which gets so many customers arriving by air, because air travel is expected to take longer to recover.

To us, the U seems the most likely scenario, and that assumes no dramatic resurgence of the virus. And it’s likely to be a modified U, with the right leg of recovery being shorter than the left leg of decline.

Interestingly, a 40 percent to 60 percent decline in customers would about match the expected cut in casino capacity. And casinos appear to be planning for that. Boyd Gaming CFO Josh Hirsberg said on his company’s quarterly investor call that, given the lower cost structure, it won’t take much to become cash-flow positive, and that Boyd is committed to achieving that.

Casinos not only will reduce costs, they’ll focus on inviting back their best players, so they get more revenue per patron. Covid-19 should finally kill off the $5 blackjack table; $25 might be the new universal minimum bet.

But just getting cash-flow positive, while it’s welcome and reassures that bankruptcy court will be left to restaurants and retailers, not casino companies, doesn’t mean getting to a level of prosperity that will support stock prices, no less lift them.

If there are two U.S. companies that seem positioned to recover more quickly than most, they’re Las Vegas Sands and Wynn Resorts. The reason is Macau.

As of this writing, Macau has not had a new case of Covid-19 in nearly a month. Its two big feeder markets, Hong Kong and the nearby mainland China province of Guangdong, appear to have the virus under control. It seems reasonable that travel restrictions between those jurisdictions will be loosened. And the lessons of lower cost structures and focusing on the most profitable customers will apply in Macau every bit as much as in the U.S.

In addition, the LVS business model, which emphasizes conventions, may bounce back in Las Vegas sooner and stronger than the leisure segment, though that may not be until 2021 and maybe deep into the year. Wynn, likewise, has a niche: the high roller, who can be brought back in both Macau and Las Vegas more easily than other customer segments.

It’s also worth noting that LVS benefits from its Singapore duopoly and, just as Macau can rebound strongly, Singapore can, too.

Current analyst consensus puts LVS stock at 15 times 2022 earnings per share and Wynn at 14 times. That’s not cheap, given the long wait to get there. But if Asia gaming recovers as it should, today’s stock prices will be bargains.

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