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Gaming Stocks Shine in '09

First-half results outperform most segments of market

Gaming Stocks Shine in ’09

Stocks of casino operators and their suppliers, having endured an earlier and deeper bear market than other industries, outperformed the overall market through the first half of 2009.

And even though there was a bit of a sell-off after June 30, gaming stocks still remain outperformers.

The 15 large casino and supplier stocks listed below rose 22.5 percent through June 30, compared to a 16.4 percent gain for NASDAQ, 1.8 percent for the S&P 500 and a 3.8 percent decline for the Dow.

The average gain goes down to 13.6 percent when predominantly lottery company Scientific Games and predominantly racing company Churchill Downs are factored in.

The best performance was by the regionally diversified casino operators. Those five—Ameristar, Boyd, Isle of Capri, Penn National and Pinnacle—rose an average of 73.7 percent for the year and a whopping 231.76 percent from their collective 52-week lows.

Next came the Big Three suppliers, Bally, IGT and WMS, up 23.1 percent for the year and 124 percent collectively above their lows.

The big-glamour casino operators, stung by worries over debt and over-capacity in Las Vegas and Macau, have fared the worst. They finished the first half 20 percent lower than where they started the year. They are 180 percent collectively above their lows, but that says more about how far down they had fallen than anything.

The list contains a couple of surprises for those who just tuned in. As much as there has been a Bally buzz and WMS wonder all year, IGT has been the best investment to date among the three.

And though Wynn is perhaps the most highly regarded of the glamour companies, its shares are still down double digits, perhaps a testimony to just how worried investors are about Las Vegas and Macau.

Isle of Capri topping the list also could be considered a surprise, but it started the year near its low.

Of course, gaming stocks are still well below their 2007 highs, and it could take a while to return to those levels. To get some sense of relative value among them, let’s look at enterprise value to EBITDA.

A caveat: These figures are trailing, so they don’t reflect big EBITDA increases that some companies should enjoy as projects open, such as Pinnacle’s River City, Churchill Downs’ Calder slots or, as MGM Mirage surely hopes, CityCenter.

Throw out Melco Crown and its 53.7 times number, and the 14 other casinos and suppliers are selling at nine times enterprise value to EBITDA. That figure rises to 9.1 when CHDN and SGMS are added.

The Big Three suppliers, which are expensive on price-to-earnings and some other fundamental measures, are the cheapest of the group on EV/EBITDA at a 7.15 percent average.

The five regional casino companies are next at nine times, which may make them fairly valued.

And the Big Three glamour casino operators come in at 13.5 times, showing that despite their troubles, a lot of investors are valuing them highly.

The big issue, of course, is where we go from here.

As always, there are bull and bear arguments to leave the rest of us in a quandary.

Bulls will point to the declines in gaming revenues having slowed down, in some cases stopped, as the likes of New York and Pennsylvania continue to rise.

Bears will say that New York and Pennsylvania may be rising, but it’s at the cost of cannibalizing Atlantic City and other markets.

Bears will say that valuations are still high by historic standards. Bulls respond that valuations are based on the performance in the recession, and they are cheap compared to growth ahead.

Bears respond with, what growth? If gaming companies have staunched the bleeding on the bottom line, it’s no thanks to the top line. It’s because of cost-cutting, and they can’t cut any more without driving away the customers they’re spending so much in promotion expense to lure.

And on it goes.

Our take is that Las Vegas is a big question mark for investors. The town will come back. Wanting to have fun is part of human nature, and no place is as fun as Las Vegas.

But who will own what casinos and emerge profitable after the building boom is the question.

There’s even question of which way the boom will lead the industry—back to recovery in public thrall over CityCenter, and other new mega-resorts? Or into restructurings and forced asset sales thanks to too much capacity built at too great a cost?

Regional casinos represent a mixed bag. Companies like Penn National and MTR Gaming benefit from slots in Ohio, but their properties like Hollywood in Indiana and Mountaineer Park in West Virginia are hurt by those same slots.

And companies can find opportunities by moving into new gaming jurisdictions.

On balance, the regional casino companies have affordability, geographic diversification and relatively low debt working in their favor.

If there is an industry segment that appears poised to rebound, it may be the suppliers.

Among trends in their favor:
• Gaming expansion in regional markets and internationally.
• Aging slot floors that must be replaced.
• New technology that offers both revenue and operating expense benefit.

Of course, many investors already have begun thinking that way, which is why supplier stocks enjoyed healthy first and second quarters.

But if the positives play out, growth can drive their shares higher.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll-free 1-866-683-4357 or online at

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