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Looking Ahead

Getting out the crystal ball to envision the next year in gaming

Looking Ahead

The third quarter earnings season is over, and attention will soon turn to what the new year has to offer.

So, what did the third quarter tell us that might lend some insight into the future?

For one, the U.S. casino market is back. Corollary to that, companies that had reduced their cost structures during the hard times are benefiting today, just as they said they would.

For another, Macau is still a big question mark, with the big question now being whether the new mega-resorts will grow the market or cannibalize each other.

Finally, opportunity for stock investors might be in emerging small regional casino companies.

• Regional gaming. Several regional gaming companies have stories to tell beyond the general rebound in business.

Penn National’s story is new properties such as the recently opened Plainridge, Massachusetts slot casino and the Jamul Indian casino opening next year near San Diego.

Isle of Capri has strong revenue growth. Pinnacle continues to grow its Ameristar properties and will soon close on its REIT deal with Gaming & Leisure Properties.

But the poster boy for the resurgence is Boyd Gaming.

Boyd CEO Keith Smith had long talked about Boyd’s cost discipline and how, when growth returned, much of that revenue would flow through to the bottom line.

It has. Boyd turned a pro forma 3.3 percent revenue increase into a 20.5 percent increase in EBITDA.

And 50 percent-owned Borgata in Atlantic City turned 13 percent revenue growth into 33.5 percent more EBITDA.

Boyd also is benefiting from a long-stagnant source, Downtown Las Vegas, which is experiencing a renaissance fueled by new bars and art galleries drawing in a young clientele. And, while Downtown probably always will be a small part of the mix, Boyd grew EBITDA there by 60 percent to $10.1 million.

• Macau. The mass-market in Macau is stabilizing and might begin to grow again, both in actual revenues and in comparison to the previous year.

The VIP business continues to decline, but  is becoming less important with the ascendancy of higher-margin mass business.

Nascent optimism was recently expressed by Melco Crown CEO Lawrence Ho, who said that recent positive policy moves by China’s government are sending the message that it’s OK to visit Macau, and that high-end mass-market customers are starting to return.

Each casino operator also makes a plausible-sounding argument for why it will do well as Macau recovers.

SJM, as the most VIP-dependent operator, sees the greatest chance for a rebound. Wynn and MGM Resorts also see their new mega-resorts as proportionally bigger expansions from their smaller footprints.

But if Macau does transform into the entertainment capital of Asia, the biggest beneficiaries could be MPEL and Las Vegas Sands.

Both will have the most non-gaming amenities and resorts that tourists can rate as must-see—Venetian and Parisian for LVS and Studio City for MPEL.

In that way, they might have the most to gain in Macau’s transformation.

Another hint: LVS has the least to lose, as VIP is a smaller proportion of its business than any other operator.

• Emerging regional companies. Monarch Casino, Eldorado Resorts and Golden Entertainment are three small operators getting bigger fast.

We’ve written about Monarch before, and are glad to see its stock has jumped 50 percent from when we first called it to attention.

Monarch enjoyed a blowout third quarter, growing EBITDA 19 percent and earnings per share 54 percent. And, while the company doesn’t break out results between its Reno and Black Hawk, Colorado, casinos, one big difference is that renovation of the Black Hawk casino ended in late August.

If Black Hawk was largely responsible for the big gains after just one month of  renovations being complete, the impact in the future will be significant.

But the larger stories for Monarch are the booming Reno economy and the coming transformation of Black Hawk into a destination-quality resort, including a luxury hotel.

Reno is booming because of Tesla building a 6,500-employee plant nearby. But the town is also enjoying a boom in technology-oriented businesses generally. That should help Monarch and its flagship Atlantis casino.

The only other destination resort in Black Hawk, Ameristar, generates $60 million a year in EBITDA. If Monarch can match that, it becomes transformational for Monarch.

Eldorado and Golden Entertainment are new as public companies, each reaching that status by merging with an already public casino operator—MTR Gaming for Eldorado and Lakes Entertainment for Golden.

Eldorado soon will completely own three large and adjacent downtown Reno casinos after it completes its purchase of MGM Resorts’ interests in two properties. That will give it scale and efficiency, thus making ERI another Reno play.

At MTR properties, ERI is implementing the amenity-driven strategy that has worked for the company in Reno.

As an operator of slot routes in Nevada, Golden is a play on population growth in Las Vegas and Reno.

The company also has gotten a license in another big slot route state, Montana, and hints that it could move into new jurisdictions.

Golden could be in a strong position if more states follow Illinois and allow slot machines in liquor-licensed establishments.

Meanwhile, Golden is rolling up the tavern business in Nevada and is keeping its eyes open for the opportunity to add to the four casinos it now operates.

With debt-to-EBITDA at just 2.5 times, Golden has the financial flexibility to grow through acquisition. And with CEO and principal shareholder Blake Sartini a veteran of Station Casinos, management knows how to run locals casinos.

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