GGB is committed to providing updated news and analysis on our weekly news site, GGBNews.com.

Blowing Up The Bubble

What to expect in 2009 from all gaming sectors

Blowing Up The Bubble

A new year is normally a time to look ahead with optimism, especially when a new president is taking office, bringing fresh hopes.
This year may be different. While investors gladly bid adieu to 2008, there is worry that 2009 will be much worse for the economy, which, of course, doesn’t lend itself to a return of the bulls.
Indeed, the financial unwinding that we’re enduring continues to spread and deepen. Problems that led to a bursting of the housing bubble now extend to every kind of investment from stocks to debt to commodities.
And problems that started in boomtowns like Las Vegas, Miami and Phoenix have now swept the globe like a plague.
Still, a large number of investors think we’ll see the bottom of the recession in mid-2009, and if they are right, now is the time to start looking at stocks.
For the gaming industry, we’ll break stocks into three segments: big Las Vegas and Macau casino operators, regional American casino companies, and slot and table game suppliers.
Big Casino Companies
Not very many months ago, the big casino operators were the glamour stocks-even blue chips-of the gaming world.
They had growth pipelines of multibillion-dollar projects in magical cities like Las Vegas and Macau. They enjoyed the leadership of billionaire visionaries like Steve Wynn, Kirk Kerkorian and Sheldon Adelson, and the pedigrees of the Packer and Ho families.
Prospects seemed endless. Dubai World brought its oil wealth to the game. Investors were awash in liquidity looking for acquisitions. Banks couldn’t lend enough.
Now, that is all gone. And it might take a while to come back.
Consider:
• Their business models have evolved toward expensive non-gaming amenities as profit centers. As such, every dollar a hotel room rate is lowered to draw players is nearly a dollar off the bottom line, for example.
• Cost structures are much higher, both operationally and in the big debt accumulated to build mega-resorts. And slashing costs could hurt more than help if customers believe they are not getting the expected resort experience.   
• Most Las Vegas customers arrive by airline, and flight schedules and ticket prices will not return to 2007 levels as fast as gasoline prices, if they ever do.
• Competition along the Strip is increasing to the point of risking a glut at the high end of a business already hurt by deep discounting. The number of hotel rooms added by Encore, CityCenter, Fontainebleau and the Caesars and Hard Rock expansions will be a lot of rooms to absorb.
Those worries have savaged the stock prices of MGM Mirage and Las Vegas Sands. Wynn, seen more as a niche operator to the recession-resistant wealthy, has held up better than the others, and could come out ahead of the game if the niche theory proves true.
Regional American Casinos
The stocks of regional casino companies have been hit hard, but a case can be made that, on business fundamentals, the worst is behind and they can look forward to resuming growth when the economy improves.
Consider:
• Cities like Lake Charles, Kansas City and Vicksburg might not have the glamour of the Las Vegas Strip. But they offer something else to casino owners-customers intent on gambling, and low-cost operations in less expensive properties.
• With elections behind, the regulatory environment is more clear. No harm has been done to casino companies. Indeed, Missouri and Colorado have enacted new casino-friendly rules.
• The wave of increasing competition might have passed. There will still be new casinos-a 10th property in Illinois, Maryland slots, for example-but not the proliferation many markets have seen in the past in most markets.
And, while it is always possible that states like Kentucky and Ohio might finally open the doors to gaming, new jurisdictions also are opportunities for the companies that enter them.
Slot And Table Game Suppliers
This segment of the industry prompts the sharpest bull-and-bear debates.
Will recession stop casinos from buying new equipment, or spur them to seek out technologies and innovative products that cut costs and boost productivity?
Will the slowdown in new casino projects in the U.S. and Macau dampen sales expectations, or will that be offset by growth elsewhere?
Will casinos wait on replacing products on relatively young gaming floors, or will they jump at new technology like server-based slots, electronic tables and intelligent card shufflers?
The best answer to those questions might be that suppliers comprise a segment where investors can pick and choose companies based on how they meet casino needs.
Suppliers that can present a true value proposition will have a powerful sales argument at a time when casinos very much want to cut costs and grow revenue.
Or, in the old phrase, suppliers will be a stock picker’s market.

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.

    Related Articles

  • Gazing at the Crystal Ball

    What will 2022 bring to an industry that needs a comeback in the worst way?

  • Inflating Investments

    At a time of economic uncertainty, where should you park your money?

  • Big Names, Big Busts

    Regional gaming, iGaming and suppliers are in good shape, but what happened to the stars?

  • How to Play the Game

    Sports betting affiliates and data providers give investors new opportunities to profit

  • Good to be Bad

    Financially, gaming companies are doing great, but why doesn’t that translate to higher share prices?