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Comeback Kids

After a good 2016, where will the success stories be in 2017?

Comeback Kids

With 2016 now behind, it’s time to focus on the year ahead.

But with a quick look back, 2016 was good for the gaming industry and maybe one difficult to replicate. Las Vegas boomed. Macau rebounded. Regional markets finally fully recovered. Interest rates remained low.

How good a year is reflected in the stocks that comprise Fantini’s Gaming Indices, especially in comparison to broader market indices:

Fantini North America      148.65            +24.31%
Fantini World                      133.23             +10.13%
Fantini Interactive             186.22             -20.11%

Dow Jones                           19,762.60        +10.88%
S&P 500                               2,238.83            +8.74%
NASDAQ                               5,383.12           +13.66%
Hang Seng                          22,000.56          -6.80%

The year represented a comeback for some unlikely sectors: Macau and suppliers.

Despite all the negative sentiment that had driven down Macau stocks, the bottoming out last summer and now five straight months of gaming revenue gains clearly caught investor attention.

Five of the six casino concession holders saw their stocks rise, led by MGM China, up a whopping 65.77 percent. Melco Crown, whose relatively new Studio City casino failed to live up to billing in spurring mass-market visitation, was the only decliner, falling 5.36 percent.

Major suppliers, likewise, had to deal with negative sentiment as investors worried about the debt piled up by Scientific Games and the continuing sluggish sales in North America. Yet, the stocks enjoyed a healthy year with SGMS leading the way, up 56.08 percent.

Tiny companies produced the biggest returns.

Table game supplier Galaxy Gaming led the way, up 327.6 percent to 58 cents a share as the company turned profitable.

DEQ, which makes side and bonus bets for table games, soared 184.62 percent as it is being bought out by Scientific Games.

Trans World, a U.S.-based operator of central European casinos, jumped 130.95 percent.

All the big Las Vegas casino operators performed well, led by Wynn’s 32.79 percent advance and followed by MGM Resorts at 26.89 percent and Las Vegas Sands at 26.23 percent.

Regional and Las Vegas locals casino operators also had strong years, with Eldorado and Isle of Capri rising in tandem since the announcement of ERI’s purchase of ISLE. ERI jumped 54.09 percent for the year and ISLE led all regionals at 73.68 percent. The merger is expected to close in the second quarter.

One of the quietest companies, Carl Icahn-controlled Tropicana Entertainment, enjoyed one of the biggest gains as investors saw low valuation and corrected that by boosting the stock 75.94 percent.

Interestingly, while Japan still doesn’t have casinos, it does have gaming companies, and several performed outstandingly. They were led by Sega Sammy, up 59.66 percent, followed by Universal Entertainment, up 52.72 percent. Konami, a consumer entertainment company with a large gaming component, did even better, leaping 63.93 percent.

So that was 2016. What about 2017?

One concern has to be that the long economic recovery might be at least interrupted by recession.

Meanwhile, the Fed has launched a series of interest rate hikes. And, while the goal is a return to normality, higher rates will increase competition for investor dollars and might sap some of the energy out of the economy.

Interestingly, high rates could benefit slot machine companies that fund giant jackpots through annuities.

If 2017 meets bullish expectations, companies to look out for will be MGM Resorts and Caesars among the big operators and Eldorado and Boyd among the big regionals.

MGM has become the analysts’ darling as it focuses on debt reduction and profit growth. The company has been helped by the Las Vegas boom. MGM ended the year with its own exclamation point as National Harbor opened near Washington, D.C., an affluent, recession-proof market of 9 million people counting Baltimore.

Caesars will likely get its operating company out of bankruptcy early in the year and begin to be followed by investors on its fundamentals again, and they are healthy fundamentals that have been masked by the bankruptcy, management says.

Eldorado will more than double in size in the second quarter when it closes on the purchase of Isle of Capri. ERI thinks it can significantly improve ISLE’s margins, and it has the track record to give that goal credibility. Further, ERI looks to expand even more through acquisitions.

Boyd has quietly put itself in a growth position with three recent casino acquisitions in the Las Vegas locals market, and by owning a chunk of resurging Downtown Las Vegas.

Here are some broader thoughts on 2017:

  • Regional casinos depend most on the health of the economy.

With retail and restaurant sales already down, it is likely that a slowing economy will at some point take its bite out of gaming.

  • Las Vegas is booming, and there is no reason for the boom to end as long as people continue moving to the Sun Belt, and that is for the foreseeable future. And reinvestment continues to make Vegas the city that reinvents itself.

However, the Great Recession showed that Las Vegas is not recession-proof, so there could be a serious interruption of the boom. Otherwise, it’s all systems go.

  • Reno and Denver are boomtowns, too. That is good news for Monarch, which has two casinos, one in each market, and Eldorado, which has a big Reno presence and will add Denver when it buys Isle of Capri and its two Black Hawk casinos.
  • Macau. If U.S. regional casinos depend on the economy, Macau casinos depend on government policy.

Policy now appears sanguine, even accommodative, after several years of near hostility.

If I had to put a few words on it, I’d say I’m neutral on the market and unsure who wins and loses in the competitive struggle, though Las Vegas Sands has the proven business model and its new Parisian fits hand-in-glove into it.

Finally, the Chinese economy could fall into recession, exacerbating the competitive fight.

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