Warren Buffet likes to say that sometimes America’s best companies are on sale.
That could be the case with IGT, whose stock sold off dramatically after its June-quarter profits slipped, even though the company maintained its earnings guidance of 98 cents to $1.04 a share for this fiscal year.
Part of the sell-off was continued skepticism over the purchase of Double Down, the social gamer that IGT acquired in February for $500 million. And despite a dip of 7 percent in the average number of Double Down users from the previous quarter, IGT said the social gamer is meeting expectations and exceeding some.
There were other reasons for concern, such as a drop in average sales prices attributed to product mix, and lower daily win per unit in the gaming operations segment when interactive business was factored out.
Yet, despite the concerns, IGT remains the industry’s leading supplier. And, as evidenced in the Roth-Fantini Quarterly Slot Survey, its ship-share of sold slot machines has been rising at a time when the slot business is growing thanks to expansion, and when the replacement market is recovering.
Thus, as both industry and company fundamentals are turning upward, IGT can be bought cheaply—a forward price-to-earnings of 9.4 at the time of this writing, an enterprise value-to-EBITDA ratio under 7, and a price-to-earnings-growth ratio below 1.
And you get a 2.1 percent dividend and a $1 billion share buyback that are financed by ample cash flow.
As said earlier, sometimes, the best of companies are on sale. This might be one of those times.
Home Cooking at Pinnacle
Investors, obviously, like it when corporate-level executives buy their stock in the open market. And when a stock sinks, it is not uncommon for CEOs and CFOs to buy some shares to send the message of their confidence in the company.
Often, however, those purchases come in token amounts—say 1,000 or 2,000 shares—which are minuscule compared to a CEO’s salary, bonus and options grants.
But that is not the case with Anthony Sanfilippo and his top team at Pinnacle Entertainment. Sanfilippo has been a serious buyer of his stock since becoming CEO two years ago.
Here’s an example of some recent activity:
One Monday, Sanfilippo reported buying 25,100 shares at prices of $9.41 to $9.73. That brought his total holdings to more than 644,000, many of which also were purchased in the open market. That same day, CFO Carlos Ruisanchez bought 20,000 shares at similar prices, bringing his total to nearly 119,000.
Two days later, Chief Marketing Office Ginny Shanks bought 10,000, bringing her to more than 62,000.
Now, that’s a management team showing confidence.
Wynn, LVS and the Macau Slowdown
As you are aware if you’ve been following this column, we’ve been cautioning on Macau for a long time, well before the now-highly publicized deceleration of gaming growth.
That slowdown has caused a sell-off of Macau casino stocks, and might be creating a buying opportunity.
Take Wynn Resorts and Las Vegas Sands, as examples. Both stocks are well off their 52-week highs. Wynn is down around $94 from $161, and LVS around $37 from $62. Yet, both generate huge amounts of cash. Carlo Santarelli of Deutsche Bank estimates that LVS will generate cash flow exceeding $3.3 billion next year and $3.6 billion in 2014. He sees WYNN generating $1.6 billion in EBITDA next year.
Those are huge numbers, and more than enough for the companies to fund their operations and the equity share of their expansions. They have begun paying regular and special dividends and, in LVS’ case, paying down some debt.
There are concerns. Macau has slowed. So far, LVS’ huge Sands Cotai Central project has grown revenues, but not explosively. WYNN is several years away from its Macau expansion. And for LVS, Singapore has had its huge growth and is maturing. So investors start looking elsewhere.
But both Steve Wynn and LVS’ Sheldon Adelson have proven themselves again and again to be able to generate wealth.
On a recent conference call, Wynn gave examples of how his company can grow in Macau even while it waits several years for its next property to open. He talked about mixing up junket operators to focus on those who will be most profitable, and about shifting table games between VIP and mass-market use, as examples.
And, while there are uncertainties over Macau’s growth and China’s economy, few doubt the region will continue to grow over the long term. Given Wynn’s record of success, the considerable cash his properties generate and his unique upscale business model, now might be a time for investors to take a fresh look.
Likewise, LVS will continue to ramp up its Macau operations, and both LVS and WYNN benefit from an improving Las Vegas, which, we expect to continue.