The past year has been pretty healthy for the gaming industry.
Stock prices of both casino and supplier companies rebounded. Companies continued to improve their balance sheets. And business trends were basically healthy.
There wasn’t much excitement, as the big mergers on the supplier side had already occurred. The REIT experiment continued with MGM Resorts spinning many properties off into a majority-owned REIT. There were no mega-mergers among casino companies, though Eldorado offering to buy Isle of Capri is a significant regional shake-up.
Internet, sports betting and new forms of gaming like eSports and daily fantasy sports made more headlines than headway. Social gaming showed signs of maturing. New jurisdictions were few and small, such as Cyprus and a few Russian locales, like the former Winter Olympics host city of Sochi. And, as of this writing, legalizing casinos in Japan and Brazil were still more promise than reality.
The biggest excitement came across the pond, where mergers of companies with heavy online operations formed giant new entities such as Paddy Power Betfair and Ladbrokes Coral.
So, where does that leave us heading into 2017? Here are some thoughts:
- U.S. regional casinos. The recent spate of gaming expansions is mostly behind, which should lead to a continuance of companies improving their profitability through efficiencies of various kinds—cost controls, more focused marketing, debt reduction and refinancing.
There will be opportunities for more property sales, including purchases by REITs, though the creation of REITs might have run its course for now.
- Las Vegas. For nearly 100 years, the big demographic story in America has been the migration to the Sun Belt.
There is no reason to expect that trend to end. As such, the Las Vegas Strip and Las Vegas locals markets should continue to grow.
- The Strip is now controlled by basically two companies—MGM Resorts and Caesars.
Perhaps the most telling development of 2016 was the decision by those two companies to charge customers to park their cars.
Those decisions tell us two things: MGM and Caesars are acting like the near-monopolies that they are, and, the Strip continues to morph into more of a tourist destination and less of a gambling town, so customers are being treated like tourists, not gamblers.
So, whether it’s upscale shopping malls, uber nightclubs, ever-larger convention facilities, four-star restaurants, or charging customers to park, this is the new Las Vegas.
- Locals market and Downtown. Three companies to watch—Red Rock Resorts (formerly Station Casinos), Boyd Gaming and Golden Entertainment.
There also are two things true about the rest of the Las Vegas Valley—the business base will continue to grow, fueled by population growth and the Sun Belt Effect, and gambling is the primary business of locals properties.
Don’t want to pay to park or not interested in $10,000 bottle service? Boyd, Red Rock Resorts and South Point properties will be glad to have you. These three public companies stand to benefit from population growth and Las Vegas’ prosperity.
Red Rock has long been known as the dominant player in the locals market, and has perfected the formula. Boyd, with about 30 percent of the locals market and over 40 percent of Downtown, is poised to ride those growing markets. Boyd also is strengthening its locals hold with acquisitions.
Golden is almost a pure play on southern Nevada’s population growth. It operates the slot routes in places like taverns, grocery stores and pharmacies and has its own chain of mostly upscale taverns, and is adding more through construction and acquisition.
- Northern Nevada. For a long time, the Reno area has been the sick man of the U.S. casino industry. No more. The town is booming thanks to high-tech companies coming to town, and, just like Las Vegas, that boom is translating into more gambling revenue.
Among public companies, Eldorado and Monarch have their biggest stakes in Reno. Golden also benefits from the growth through slot routes.
- Macau and the Far East. Macau gaming revenue has been growing again as new resorts like Wynn Palace and Las Vegas Sands’ Parisian have opened, the city continues to broaden its customer base, and most of the government policies to attack corruption and money laundering have played themselves out.
Indeed, there is even some cause for optimism about government policy as compliant Macau can be held up by the national government as a model in comparison to politically rambunctious Hong Kong.
One threat to Macau has been the increasingly ambitious plans of casino developers in Australia, the Philippines, South Korea, Southeast Asia and Far East Russia to build resorts based on attracting Chinese high rollers.
We’ll see in the coming year whether the mainland government’s recent crackdown on foreign companies poaching Chinese gamblers becomes a broad and effective policy. If it does, Macau just might continue to grow substantially in 2017 and beyond as mainland China’s favored gambling locale.
- New gambling—the internet, sports betting, daily fantasy sports, eSports.
It isn’t clear that any state will out-and-out legalize internet gaming in the coming year, but it would not be surprising to see state lotteries continue to enter the space. And with New Jersey and Delaware online revenues now growing by double digits, a New York or Pennsylvania just might make the leap.
Daily fantasy sports made some progress in being specifically legalized in a number of states last year, and that should continue, though for investors there are few ways to play trend.
The big question for 2017 might be whether sports betting is legalized outside of Nevada and grandfathered states. The legislative and judicial cracks are growing, and a breakthrough could cause a deluge.
We would not be surprised to see the dam break in 2017, or no later than 2018.
