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Bear Necessities

Gaming stocks continue to disappoint on Wall Street

Bear Necessities

Pessimism is now officially the Wall Street theme for gaming stocks.

The leading gaming analysts took out their crystal balls and peered into 2009.

What they saw isn’t pretty.

Their consensus: investor sentiment is lousy, business trends are lousier, and there is no sign of improvement in the near future.

Many of them then slapped on target prices even lower than the stock prices that day.

That is very unusually bearish. It is a stance perhaps driven by having been burned so many times since 2007, as every time an analyst thought the fundamentals justified calling a stock oversold, the price fell further.

Yet, there are some causes for tentative, cautious optimism.

Prices have fallen so far that even bears see value, though many remain on the sidelines fearing the effects a deepening recession might continue to have on stocks.

Additionally, not all stocks are created equal.

In fact, many analysts appear to have come around to our long-held position that Las Vegas is fraught with great risks, and that selective regional casino stocks, like Pinnacle and Ameristar, may enjoy the best prospects in an unpredictable economy.

We also saw wisdom in the words of Joe Greff at JP Morgan.

Noting that investor sentiment on gaming stocks is as miserable as it was in the late 1990s and in 2002, Greff cautioned investors not to be totally swept into bearishness but to be prepared to be nimble. Stocks can, and did in those periods, spike when the negative sentiment dissipated.

Of course, the economy is not the only factor that can influence how investors view the prospects for gaming companies.

State legislators have a role to play, especially as states turn to gambling to help fill budget deficits.

Their decisions can cut both ways. Gaming tax increases would hurt all gamers. Legalizing new casinos or slots at racetracks would help supplier companies and open opportunities for casino operators that get to join the new markets, but hurt those in existing markets.

Here are some states considering gaming expansion:

• Delaware might legalize sports betting to offset growing regional slots competition. The impact might be limited, especially since parlay betting would probably be the only kind allowed by Delaware law, which requires betting be interpreted as a lottery.

More interesting would be the introduction of table games, which the state’s racino managers think can be done, pointing to fellow VLT state West Virginia as evidence.

Tables in Delaware could shortstop a significant number of Atlantic City gamblers.

• Florida. There’s no telling what comes out of compact negotiations with the Seminole Indians, but there appears to be no stopping them from developing a network of seven full-fledged casinos.

• Iowa could add a couple small casinos, but the impact for investor purposes would be limited.

• Kansas may re-examine its casino law, but a failure of a second round of gaming bids could sour legislators on the whole idea. Look for Cordish-Kansas Speedway to win a rebid phased-in contract for casino development in Wyandotte County near Kansas City, Kansas, casinos.

• Kentucky keeps trying, but there’s enough conflict between casino advocates and racetracks to keep this Bible Belt state from expanding gaming.

If Kentucky does succeed, it would be a negative for southern Indiana casinos such as Penn National and Pinnacle.

• Massachusetts. Another effort will be made for casinos or slots at tracks. Slots might get more sympathy this time as a pure revenue generator and to protect jobs at dog tracks when racing ends next year.

• New Hampshire likewise will be pressed to pass slots at racetracks.

• New York appears likely to extend slot parlor hours to 24/7 from 16 a day, and may approve up to 5,000 slots at Belmont Park. That would be yet another negative for Atlantic City operators.

• Ohio keeps defeating gaming referendums, but there’s been a subtle change that might make the difference. Governor Ted Strickland has softened his opposition to gambling expansion, citing the economy in this hard-hit industrial state.

And if a proposal would allow Penn National to be among the casino operators, a big source of opposition that killed the 2008 referendum will have been removed.

Ohio casinos would not be good news for those southern Indiana operators again. It could be a big plus for MTR Gaming, which, although it would lose a number of Ohio gamblers at Mountaineer Park and Presque Isle Downs, would likely get slots at Scioto Downs near Columbus. And, with the Jacobs family of Cleveland owning a big chunk of MTR, more opportunity could come the company’s way.

• South Carolina was a big video poker state before the state Supreme Court put operators out of business. Now, the legislature might get nostalgic for those days, especially if it can tax them enough.

• Texas. Like Kentucky, disagreement between casino and racetrack advocates has been an obstacle for legalizing gaming.

Racetracks have more hope this year. They point to the racing industry being united on the issue for the first time and to new House Speaker Joe Straus as having family ownership of a racetrack. But slots might not be that easy. Governor Rick Perry still opposes expanded gambling and casino advocates still want stand-alone casinos, which would require a constitutional amendment.

If Texas does expand gaming, it would diminish western Louisiana markets where Harrah’s, Isle of Capri, Boyd and Pinnacle compete, among others.


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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