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Back In Action

After several years of uncertainty and doubt, gaming investors are back in force, and for good reason

Back In Action

It’s taken a long time, but stock investor sentiment on almost all the gaming industry now appears sanguine.

First, the Las Vegas rebound found adherents.

More recently, regional casino operators have imbued investors with confidence.

Now, investors are starting to see light at the end of Macau’s tunnel.

Analyst Kai Tan of Macquarie was among the first to turn around, raising the Macau market as a whole to neutral and upping his target prices on all six casino concession holders.

On specific companies, Tan upgraded Sands China to outperform and Melco Crown to neutral.

He forecasts citywide gaming revenues to fall just 2 percent this year, be flat next year then finally rise again in 2018, though at a snail’s pace of 3 percent rather than the 40 percent rocket rides in the halcyon days of not so long ago.

Then, Steve Wynn gave a big boost to Macau stocks when Wynn Resorts sounded a bullish call in its first-ever analyst day presentation, and his stock took off.

David Katz of Telsey Advisory followed by raising his rating on Wynn to outperform following its analyst day presentation in which WYNN outlined growth prospects in Macau, Las Vegas and Boston.

Investors can doubt WYNN’s bullish outlook, but management has a record of executing and accelerating earnings to support higher valuations, Katz said, adding that he has chosen to get ahead of the curve.

Katz put a $112 target on WYNN, which is 18 times his 2017 earnings estimate of $6.29 a share. He also raised his EBITDA estimates to $1.083 billion this year and $1.602 billion next year.

In addition to WYNN’s projection of greater profitability in Macau when Wynn Palace opens later this year, the company anticipates:

• Paradise Park, a new development at Wynn Las Vegas, to generate $300 million to $400 million in EBITDA a year versus the $5 million at the golf course it will replace.

The post-2019 development would include 1,000 hotel rooms, a small casino and a 38-acre


• Boston Harbor to generate $300 million to $400 million a year in EBITDA after it opens in 2019.

Further, WYNN thinks it can cut its debt-to-EBITDA ratio to four times next year and then three times after peaking at 6.9 times this year.

Thomas Allen of Morgan Stanley said that if WYNN achieves its estimates, the stock is worth $175 vs. his current target of $120.

The bottom line is that WYNN stock, which dipped nearly to $50 in October, briefly went past $100 on the day after the presentation.

Next up for a sentiment turnaround are suppliers, and that might not be too long in coming.

The industry’s two biggest players, IGT and Scientific Games, recently announced stronger-than-expected financial results, debt is coming down, and those now-prosperous U.S. casinos appear to finally have started planning to freshen their floors with new slot machines.

Other companies, such as Aristocrat and Ainsworth, already had shown the way to sunnier times, but IGT and Scientific Games are the giants that can set the tone for Wall Street.

How much casinos might loosen purse strings is subject to considerable debate.

Todd Eilers of Eilers & Krejcik Gaming has quantified the trends in his quarterly industry outlook.

In the fourth quarter, North American slot machine sales rose 15.6 percent over the previous year to 19,200 units, reversing the full year’s 8.4 percent down trend, according to Eilers.

Sales were driven by 4,000 units shipped in new and expanded casinos, including Scarlet Pearl, which opened in D’Iberville, Mississippi, and 1,200 more VGT placements in Illinois compared to 600 units in the previous year.

But what many observers look at as a key for slot machine companies is the replacement market.

With approximately 1 million slot machines in North America, replacing them at the rate of just one every 10 years—which would be a historically low number—would amount to 100,000 replacement sales.

However, replacement sales have been below 60,000 in recent years. Much of the blame went to the Great Recession forcing casinos to cut back purchases. But the recession is long since over, as noted above.

Another problem is that casinos simply offer fewer slot machines today.

Eilers reported mixed results on replacement sales.

Replacement sales inched up 0.8 percent to 15,200 units thanks to continuing replacement cycles in Oregon and Canada VLTs.

However, factor out Oregon and Canada and sales slipped 0.9 percent, hardly a bullish sign.

Another way to look at sales is what casino and slot managers say they intend to do.

In the fourth-quarter Eilers-Fantini Quarterly Slot Survey, those executives said they intend to replace 7.2 percent of their machines this year.

Put all together, it would appear that the supplier sector still needs accelerated growth, as well as continued improvement by the industry leaders, for their stocks to meaningfully recover.

So, there is a mixture of sentiment: growing confidence in regional casinos and in Las Vegas, early and tentative hope that Macau has found bottom, but still concern about market conditions for suppliers.

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