Correction Concerns

Will gaming stocks continue the bull run?

Correction Concerns

A danger in writing a column well in advance of publication is that circumstances can change dramatically before it sees print.

That is true in writing about the stock market at any time, but especially this year.

As of this writing, the Dow Jones average has fallen more than 1,000 points in two of the past four days, and we don’t know whether we are experiencing a correction, whether that correction has run its course or has more downside to cover, or whether we are at the start of a bear market.

What has been true so far is that gaming stocks, which far outperformed the market during its great bull run, continue to outperform on the way down. For example, the Dow dropped 4.6 percent on the first big day down and 4.15 percent on the second, compared to 3.25 percent and 3.74 percent drops for Fantini’s North American Gaming Index.

The difference might not have been so much confidence in gamers as investors fleeing certain big-cap stocks, as the gaming declines were closer to those of the Russell 2000, whose component companies are nearer in size to the typical casino stock.

And, of course, investors did react to specific company news. Penn National sold off 7.95 percent on the second big down day, helped by reporting four-quarter financial results that disappointed some analysts. Scientific Games is down 27 percent from its peak, but that is still five times higher than when its bull run began in the summer of 2016.

One investor concern is potentially higher interest rates if the Federal Reserve Board thinks the economy is overheating and driving up inflation. That would be a concern for gaming companies, many of which have considerable debt, though they also have spent the past year or so refinancing down to lower interest rates, converting variable debt to fixed interest, and putting off maturity dates to buy time for the economy and their own finances to work their way out.

Still, a caution to investors: look at the debt structure with a keener eye today.

Wynn Resorts

Steve Wynn’s resignation as CEO of his eponymous company started immediate speculation that Wynn Resorts may be sold at some point, if not in the near term.

A possible sale makes sense at first glance, considering the company, no matter how well managed, has lost its founding genius, which seems likely to dim some luster over time. However, MGM Resorts CEO Jim Murren was quick to throw cold water on that idea, pointing out that WYNN’s $17 billion market cap makes it a pretty big company to swallow. The days of mega-mergers are over, he said.

But to Murren’s no-so-fast, we’ll add our own not-so-fast, Jim.

There might be a business analogy to the old expression that you eat an elephant one bite at a time. In this case, it might be that you don’t sell the whole Wynn Resorts elephant at once, but that you sell it one piece at a time.

That might not be the first choice, but could be an option if regulators decide to get tough, depending on what they find in their investigations that initially will look at sexual misconduct allegations against Steve Wynn. For example, if Massachusetts decides Wynn Resorts should not retain its license, the company would have to sell its $2.4 billion Boston casino project.

If Macau regulators come to the same conclusion, Wynn’s properties there, and the company’s gaming concession, would be attractive to any number of Asian companies.

And if those dispositions happen, the Las Vegas properties would be affordable for a neighboring Las Vegas Sands, or an international company wanting to get onto the Las Vegas Strip in a big way.

AGS, Let’s Play

There’s a new kid on the block for investors in gaming technology companies: PlayAGS or, as it is better known, just plain AGS.

AGS IPO’d recently at $16 a share and the stock is over $19 as of this writing, giving it a market cap around $650 million compared to billions of dollars for IGT, Aristocrat and Scientific Games, but in the same ball park as smaller competitors like Everi and Ainsworth.

The story for AGS can be summed up in one word: growth. A company that had maybe 1 percent market share in slot machines not long ago is now around 6 percent ship share, and double digits in several key jurisdictions. Further, AGS is on the start of its growth in terms of entering new markets, competing in Class III slots as well as its historic Class II business, developing table games and broadening its product lines.

A second very good word is profitability. AGS generated $83.4 million in EBITDA in the third quarter on $154 million in revenues, a 52 percent margin.

A final very good word is leadership.

AGS’ CEO is David Lopez, youngish at 43, but an industry veteran who helped build Shuffle Master into a significant company, subsequently sold to what is now Scientific Games, and who was CEO of what is now Everi. Lopez has built a management team replete with Shuffle Master colleagues, and intends to make AGS into a significant table game player.

When investors on AGS’ IPO road show asked how the little company would grow in the face of competition from the big rivals, Lopez pointed to current trends and said, “We’re not planning to do it; we’re doing it.”

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