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Certainty in Uncertain Times

What are the trends investors can depend on during worldwide turmoil

Certainty in Uncertain Times

As I sit at the keyboard about to write this column, much of the world is transfixed as the rest of the world is fast selling everything it can to pile into whatever appears to provide safety, from gold to, ironically, U.S. government bonds.

President Barack Obama is about to address the nation, and in anticipation, stock prices are falling, as though whatever he says will be cause to sell.

In this environment, it is difficult to write a column of some lead time because whatever is written will be outdated by the time it sees print, maybe even just minutes or hours after it’s written and the “-30-” in the old newspaper style has been typed in at the end.

And amid all the talk about double dips and U.S. bond ratings, and a euro crisis that can knock the underpinnings out from under the world economy, it is difficult to gain some perspective, no less the equanimity to say, this, too, shall pass.

But in the world outside the frantic financial markets and the breathless voices of CNBC, things look pretty much the way they did before the sell-off, and better than a number of months ago.

Consider the trends in the lodging and casino spaces that we call home:

• The three biggest pure-play regional casino companies have all announced earnings, each better than expected, each demonstrating the ability to bring even modest revenue improvements to the bottom line, and each saying that business is picking up among their most affluent players. And that those trends continued into July.

That caused prices to pop on Penn National, Pinnacle and Ameristar as earnings estimates and target prices rose.

Then, the market sold off on issues having very little to do with the fundamentals of regional casinos, save, of course, a possible double dip.

So, as of this writing, Ameristar is selling at half of its growth rate, a forward 8.8 price-to-earnings ratio, and 6.45 enterprise value to EBITDA.

PENN is at three-quarters its growth rate and 7.4 times enterprise value to EBITDA.

Pinnacle, long an EBITDA story (not earnings story), is at 8.05 times EV to EBITDA.

And each of these is an earnings growth company—Ameristar through paying down debt, PENN as it opens Ohio casinos and PNK when it opens a casino in Baton Rouge, plus as it continues to improve EBITDA margins as new management finds efficiencies.

• Las Vegas-Macau. It’s pretty hard to be pessimistic about any of the operators in Macau, nor the two biggest Las Vegas Macau plays, Wynn and Las Vegas Sands.

One can always question whether their stocks are overvalued, but their long-term business fundamentals are clear, barring the unforeseen.

During the last market meltdown, those stocks were slammed by the collapse of the financial markets, with LVS and MGM Resorts nearly done in.

That shouldn’t be an issue this time. Meanwhile, Macau is booming, and for LVS, add in Singapore, which is about to generate $1.6 billion in EBITDA alone.

• Suppliers had taken a tumble even before the sell-off as their fundamentals generally haven’t improved and the return of that darn North American replacement cycle keeps getting kicked down the road.

Still, they got clobbered in the sell-off. Here are the forward PEs of the biggest suppliers, all reasonable to cheap: Aristocrat 12.8, Bally 12.9, IGT 13.3 and WMS, a recent darling, now mimicking a fallen angel, 8.1.

• Lodging. Company after company is reporting growing earnings that are stronger than expected, sometimes significantly so.

The improvements are driven by occupancy, but more by increased room rates that, in turn, drive up RevPAR. And this is happening as the least amount of supply ever is coming to market, assuring pricing power, unless the economy deeply double-dips.

In some cases, these figures are specific to the gaming industry, such as the recent increased room rates along the Strip.

Or they hint at direct gaming effect, such as the recovery of group and convention business that has become such a large part of the Las Vegas Strip business model.

But in any case, the lodging recovery spells good news for the gaming industry. As Patrick Scholes of FBR Research recently reported, there tends to be a correlation between rising room rates and increased gaming revenue.

So, while the big economic trends are scary, and may have dramatic and unimagined consequences by the time this column sees print, there is also reason to believe that gaming industry fundamentals are strong enough to give bargain-hunters buying opportunities when the dust clears.

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