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Higher & Higher

Raising salaries is an investment, not an expense, even in a recession

Higher & Higher

A lot of attention has been given recently to the effects a recession would have on casino companies.

It might be time to shift emphasis to inflation.

Of course, the two are intertwined, as the antidote to inflation of higher interest rates might poison the economy into recession.

But inflation in itself can depress the hard-won high operating margins that casino operators have achieved through cost reductions.

In addition, the higher rates paid to debt holders create a competitor to stocks. Why, after all, own stocks in uncertain times when risk-free government notes pay over 4 percent? Plus, higher interest rates raise carrying costs for companies with variable debt and will add to the expenses of those seeking to refinance debt or borrow to fund growth.

But let’s stick to inflation itself for right now.

Wages are one major and obvious area of rising prices. Take two recent examples:

• Atlantic City: The Unite Here labor union has negotiated big wage increases from AC casinos. Starting pay will rise from $18 to $22 an hour in the fourth year.

That is a big increase. And you can bet what happened in Atlantic City won’t stay in Atlantic City. It will follow in some manner in the rest of the country.

• Hard Rock has gone even further. It has raised pay for 10,000 non-tipped employees—95 percent of job classifications, including cooks, housekeeping and front desk workers—with minimum pay going from $18 to $21 an hour.

Some workers will get 60 percent raises. In Florida, entry-level pay will rise $16,000. In Atlantic City, entry-level pay will go from $27,040 to $37,440.

Hard Rock’s assertiveness might prove to be a brilliant strategic move by making it an employer of choice in lodging and hospitality much like Costco has become an employer of choice in retail, and helping it attract and retain high-quality employees who give it a competitive advantage that outweighs their higher costs. In other words, having the best workforce isn’t an expense. It’s an investment that generates a return.

But there is no question that, just like unions will negotiate higher wages for members, companies competing for labor will have to pay more in salaries and benefits.

Inflation will affect a wide range of expense items from electricity to cleaning supplies.

Here is a somewhat off-the-wall example, but the kind companies face—in his first-quarter earnings conference call, Full House Resorts CEO Dan Lee described how the price of crab meat had squeezed EBITDA margins at Silver Slipper Casino in Mississippi. The price had shot up 110 percent, and Full House spent $4.6 million for crab meat on a popular buffet item, up from $2.4 million in the previous year.

The decision was made to maintain the buffet price and—you should excuse the expression—swallow the higher price of crab meat.

Casino operators will be facing similar decisions in many more ways as inflation works its erosive way through operations.

Put simply: In upcoming conference calls, it will be wise to look at the outlook for costs, as well as those for revenues.

Stick With Results, Not Promises or Projections

OK, we’ve been at this long enough so that we know the lay of the online sports betting-iCasino landscape.

Forget all of the news releases announcing new markets and sports sponsorships ranging from teams to star players to venues.

The fact is we now know the leaders—month after month, season after season, jurisdiction after jurisdiction, all of the noise and headlines aside.

Flutter’s FanDuel is clearly first in revenue share, followed by MGM and Entain’s BetMGM and DraftKings.

There is a second tier of fast risers: Caesars, then Penn Entertainment and Rush Street Interactive.

There are differences from market to market and in sports betting and iGaming in those markets, and there are smaller players making relatively big splashes in some places, like PointsBet in Michigan. And there will continue to be more announcements promising transformational events.

But the fact is that the Big Three are the Big Three, with Caesars growing to perhaps make it a Big Four at some point.

Here are July’s rounded-off revenue shares from Fantini’s U.S. Online Sports Betting and iGaming Report:

Flutter                              34 percent
Bet MGM                          22
DraftKings                       22
Caesars                             7
Rush Street                       5
Penn Entertainment         3
The rest in the U.S.:       a combined 7 percent

As enthusiasts for small-cap growth stocks, we will not discount the value of searching for rising stars among the smaller players. And we’ll certainly follow companies that serve the industry: data companies such as SportRadar and Genius Sports, affiliates similar to Catena and Better Collective, and games platform providers like Bragg Gaming.

But for many investors, the game is among the big players, which means the six listed above.

And for companies in the space, the time has come to switch discussion from promises to profitability, or at least credible paths to profitability in a reasonable time.

And it might not be the pure players that are the best bets in this new digital wagering world.

Caesars, Penn National and MGM have strong brick-and-mortar businesses to provide support and stability. Flutter has a big United Kingdom betting business to provide support, as well as Boyd Gaming, owner of 5 percent of the U.S. gaming network.

How well these brick-and-mortar operations are aiding online ambitions—and not cannibalizing physical business—is another area that should interest investors.

Online sports betting and iGaming now have fairly long track records to help investors make decisions, and the data is a lot more complex than the loud and blithe market share predictions too many company executives have gotten away with making.

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