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Bear Hunt

Gaming stock hit hard by combination of factors

Bear Hunt

The combination of the slowing economy and frozen credit markets has hit gaming investors especially hard.

Gamers suffer from mostly being small caps in a small-cap bear market.

They are consumer discretionary stocks, the hardest hit heading into recession.

They are very capital intensive, and, suddenly, money to finance the growth pipelines is not available or, available at higher costs.

There is fear that some markets are becoming saturated, or at least full enough that new and expanding properties begin to cannibalize each other.

Indeed, the highly touted growth pipelines that buoyed stock prices last year are now irrelevant if they cannot be financed at reasonable cost, or become albatrosses to investors worried about cannibalization.

Finally, throw in pessimism over the financial markets generally.

The result of all these worries is that gaming stocks and bonds have gotten crushed, mergers and acquisitions are gone, and a number of casino projects are being scaled down, postponed or outright canceled.

Hardest hit within the space have been the stocks of regional casino companies.

Here’s their swoon from 52-week highs:

? Ameristar -51 percent
? Pinnacle -51
? Boyd -62
? Isle of Capri -69

And much of the declines have come recently. Here’s their performance just since New Year’s:

? Ameristar -32 percent
? Pinnacle -35
? Isle of Capri -37
? Boyd -39

What is astonishing about these price collapses is that the above are solid companies. They were here a decade ago and they will be here tomorrow, next year and a decade from now, barring buyouts.

And they have credible growth plans. Ameristar intends to double EBITDA over several years. And, while its East Chicago riverboat is having difficulties, it will be redeveloped and Chicago is a deep enough market for everyone to prosper. ASCA also will open Black Hawk’s only destination resort hotel next year, and is expanding at Vicksburg.

Boyd opens the Water Club at Borgata in June. An upscale hotel opens at Blue Chip in December to expand both the geographic and demographic reach of BYD’s number-two cash flow generator. And Echelon, for believers, will put BYD in the mainstream of the Las Vegas destination resort business.

Pinnacle will grow EBITDA from $170 million to $600 million over the next several years with expansions and new projects that started to go online in December with the L’Auberge hotel addition and the opening of Lumiere Place.

Of course, amid the wreckage lies opportunity. Many of the bonds of these companies are selling well below par, giving investors the chance to lock in double-digit payments and the chance for capital gains when prices improve.

As Pinnacle CEO Dan Lee recently noted, his bonds are yielding 13 percent at recent prices, but his stock will yield more than 20 percent as the company grows.

The slowdown, and cancellation, of projects also helps hold down the competition for companies with existing properties, thus improving the environment for both their existing and growth projects.

This benefit will especially apply in Las Vegas, where MGM Mirage, Las Vegas Sands and Wynn are firmly ensconced with new properties while some of their competitors age, and prospective competitors put projects on hold.

Meanwhile, the very fact that stock prices have been beaten down so low in itself presents opportunity for when prices return to normal.

Another company whose price might have gotten beaten down to levels far below its business prospects is Trump, which is 82 percent below its 52-week high.

There is a glimmer of hope that Trump’s Atlantic City market has passed the worst hits it is going to take.

Most of the Pennsylvania slot parlors have now been open a year, so AC’s base has been established and it should be able to grow from here.

Likewise, the 75/25 smoking ban is now a year old.

And new hotel towers are being added to what everyone agrees is needed room capacity to capture convention business, draw higher-value players than the day-trippers lost to slot parlors, and just plain bring more people to town to share among properties.

The first of these additions has added 960 rooms to Harrah’s. Borgata’s 800-room Water Club opens in June. And Trump opens its own 782-room Taj Mahal addition in September.

A hint of what could be the turnaround occurred in February when AC casinos, helped by a favorable calendar, finally increased gaming revenue over the previous year. And Trump, despite low table hold at the Taj, led them all with 4.9 percent growth at its three casinos.

So, there have been troubles galore for gaming investors.

But at some point casino stocks will come out of the funk, and the stock and bond prices of early 2008 might then look like the rare bargains that long-term investors dream about.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll free: 1-866-683-4357 or online at www.gaminginvestments.com.

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