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Clean Sweep

Gaming won big in November elections

Clean Sweep

America might be divided by Republican and Democrat and left and right, but one thing is clear: Americans by significant majorities support gaming.

The numbers in elections were stunning, a clean sweep as every gaming referendum passed, from the first of a two-step expansion authorization in Colorado to sports betting legalized in three more states, to long anti-gaming Nebraska authorizing a half-dozen casinos at racetracks, to four casino-authorized cities in Virginia approving projects.

The winners are many: companies heavy into sports betting such as DraftKings, Penn National and MGM Resorts; casino operators in multiple states where gaming was expanded with Caesars, Churchill Downs and, of course, Penn National again; and gaming suppliers as Virginia and Nebraska open new markets.

For most of those companies, however, the impact will be limited by the fact that the expansions will be incremental to their large operations, not revolutionary.

Perhaps the biggest winner is Monarch Casino, whose soon-to-open destination-quality and scale property in Black Hawk, Colorado, will now be able to compete for high rollers and other avid gamblers who have made Denver the third- largest feeder market to Las Vegas. The same is true for Penn National and Caesars in Black Hawk, but for little Monarch, with just two properties, turning one of them into a money machine will have a much greater impact on the stock.

As a whole, Monarch generated $61.687 million in EBITDA last year, most of it from its Atlantis Casino in Reno.

EBITDA might reach $95 million or $100 million with the Black Hawk property expansion. And that estimate is before the impact of the referendum that will basically result in the lifting of the $100 bet limit and allow games like baccarat and pai gow. The one contingency is that the 120-person town of Black Hawk must pass an enabling referendum, which is almost a certainty, and it should happen in the first half of next year.

Estimating the earnings impact of the referendum is a bit of a guessing game, but Macquarie analyst Chad Beynon puts the value of the gaming expansion at $2 to $5 a share.

Other small public companies that stand to benefit with even modest expansion are Golden Entertainment, which can now offer sports betting in Maryland; and Full House Resorts, with its Cripple Creek, Colorado, casino.

Talking about stunning numbers, regional casinos supplied them in the third quarter.

Casino operators had said that lower costs would offset lower revenues. And boy, did they, from big operators like Caesars to the above-mentioned Monarch.

Let’s use Boyd Gaming and Red Rock Resorts as examples.

Boyd’s third quarter EBITDA grew over 12 percent from last year on a 21 percent revenue decline. EBITDA margins soared 10 percentage points to a record 36.6 percent.

Red Rock’s numbers were even more impressive. EBITDA soared 45 percent despite 24 percent lower revenues. Margins hit a record at 46 percent.

More important, they promised this was the start of a new business model and not just a temporary effect that will disappear when the Covid-19 pandemic disappears.

Here were Boyd CEO Keith Smith’s comments on his company’s investor conference call: “Today is our new normal. We have established a more efficient and more focused business model over these past several months and we are determined to sustain higher margins going forward.”

Smith discussed the lower costs, in part a result of marketing focused on high-value customers, several times in the call, then reiterated, “We are committed to sticking with this refined business model. So, right now the model is creating profits in excess of last year’s profits, and we are pretty pleased with that.”

In Red Rock’s call, CFO Steve Cootey said the company expects more than $150 million a year in permanent savings through streamlining operations, more focused marketing and renegotiating vendor contracts. Higher margins are here to stay, he declared.

Clearly, these are encouraging trends. But they are not unalloyed. Some of the reasons for the higher margins may be the reasons for future concern.

Take labor as an example. Casino companies have reduced workforces. Good for expenses now. And government aid has helped consumers continue to spend, and another round of stimulus is almost universally expected.

But lower permanent employment does not fuel future consumer spending. And gaming isn’t the only industry reducing employment. Millions of unemployed people is not a recipe for success for consumer discretionary industries, or their stock prices.

In other words, as encouraging as the efforts and results being achieved by American businesses may be, there is still risk of recession after recovery.

Green Shoots?

While the public is focused on the rising number of Covid cases, there may be some reason for encouragement that the American economy will muddle through.

Mainly, governments are slowly allowing businesses to reopen, improved medical treatment is dramatically reducing the fatality rate, and people in general are learning to live with the virus being around.

Nevada is an example. Already problematic group and convention business disappeared when the state imposed a limit of 50 people at gatherings. When that cap was raised to 250, events such as weddings quickly started coming back.

Now, Governor Steve Sisolak says he will allow convention business to return at 50 percent capacity starting in January.

We see similar loosening in other areas. Baseball played without fans until the playoffs moved to Texas and more than 10,000 people were allowed to attend. It will not be surprising to see greater numbers allowed in more cities for more sports as time goes on.

All of that might not make for exuberance, but it can bring significant relief to entertainment and leisure industries.

Meanwhile, investors may have to be patient, as it looks like 2022 before a complete land-based revenue recovery, but with those higher margins and burgeoning online operations, 2021 can be a good year for profitability.

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