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Post-Earnings Potpourri

As always, another wave of earnings reports has garnered a smattering of observations and predictions

Post-Earnings Potpourri

The third-quarter earnings report season has ended for U.S.-listed stocks, and it’s fair to say that for gamers it was uninspiring.

By and large, companies slogged through the quarter and few offered hope of much improvement as inflation and a slowing economy start to take hold, leaving executives to nearly unanimously use the word “uncertain” to describe the coming months and year.

As should be expected from such an environment, stock prices have mostly muddled along with a few gainers and a few losers but most, well, muddled.

Part of the problem is the stock market itself. While the big indexes such as S&P 500 and Nasdaq 100 rose nicely, they have been increasingly led by a narrow group of big cap—and at that, mostly big tech—names. The Russell 2,000, whose smaller stocks are more akin to gamers in market cap, may be more indicative. The Russell has fallen 9 percent in the past year compared to gains of 12 percent and 22 percent for the S&P and Nasdaq.

Of course, gamers have their own challenges. Revenues in many markets are down a few percent on a same-stores basis. And even small gains mask weakness. A 2 percent gain, after all, is really a decline when factoring in inflation at 4 percent or more.

That doesn’t mean there aren’t growth opportunities but, outside of digital, gaming is now a mature industry. And, as the rollback of hotel prices in Las Vegas in advance of the Formula 1 auto race demonstrates, you can only charge customers so much.

With that as a backdrop, here’s a potpourri of observations:

    • Yay for the Big Three. While gaming operators garner the most attention, the game suppliers are prospering. And, despite the proliferation of upstarts, it is the Big Three making the biggest gains. According to the latest Eilers-Fantini Slot Survey, for example, IGT, Light & Wonder (LNW) and Aristocrat continue to dominate, combining for 74 percent trailing 12-month ship share. IGT was the biggest gainer, at plus-6 percentage points.

      That dominance should continue. Survey respondents plan to allocate 73 percent of their spending to the Big Three in the coming year: 32 percent to Aristocrat, 25 percent to Light & Wonder and 17 percent to IGT.

      The stock prices have followed, with all three up double-digits. Light & Wonder—now Aussie North with a secondary listing in Australia and led by Down-Under natives Jamie Odell as executive chairman and Matt Wilson as CEO—is up a whopping 51 percent over the past year. LNW promises more ahead as sales grow and debt falls.

    • Hey, Mom, look at us! A couple of youngsters are showing their stuff, too. AGS ship share, excluding slot routes, is at 7 percent and privately held Bluberi has crashed the leaderboard at 4 percent, according to survey respondents.

      Interestingly, AGS stock hasn’t caught up with the growth of its business and financial performance, suggesting there may be opportunity in its shares.

    • On the other hand, Everi stock has lost 33 percent and its ship share has fallen in the latest survey despite the promise of record numbers of products.

      One has to wonder whether it’s worth revisiting the idea of Everi in some manner separating its games and fintech businesses to unlock value.

    • Don’t look now, but sports betting is getting respect again. This past year has seen a maturing of online sports betting and casino markets as small companies leave and incumbents grow.

      The most interesting pure play in the space is also the biggest player in the space—DraftKings. The company’s stock, while well below the highs experienced during the heady early days of the legal industry, is growing appreciably. At around $35 a share, it has more than tripled from its lows.

      Another interesting play is Penn Entertainment, which has launched its partnership with ESPN. A case can be made that Penn’s stock reflects the value of its land-based casino business, thus providing the digital industry to investors for free.

    • It ain’t “Wow Macau,” regardless of what you’re told. The headlines are relentless. Every day there’s another loud tout about Macau storming back. But the reality is that Macau business volumes are still well below pre-Covid levels, and even as business recovers it is at a slower rate than the investment casino operators are making there.

      Investors have noticed, and the stock of no U.S.-listed operator is much above where it was a year ago, and all are well below their peaks of earlier this year.

      Even then, the stocks may be more reflecting strength in Singapore for Las Vegas Sands and on the Las Vegas Strip for MGM Resorts and Wynn Resorts.

      This doesn’t mean Macau won’t grow, but investor expectations are now reasonable.

    • Gotta love dem locals. If there is a growth market in the U.S., it might be Las Vegas locals. The reason is simple—Las Vegas population continues to grow thanks both to in-migration and the continuing diversification of the economy. Even the boom on the Las Vegas Strip helps the locals market, as tens of thousands of casino employees unwind in locals joints spending their union-won larger paychecks.

      The two pure plays in that market are Red Rock Resorts, led by brothers Frank and Lorenzo Fertitta, and Golden Entertainment, led by Fertitta brother-in-law Blake Sartini.

      Each company has a different approach. Red Rock plans to systematically double its casino business and to cater to an increasingly upscale residential base. Golden is incrementally adding to casino amenities and otherwise focusing on being hyper-local with a network of taverns. Soon to be gone are its low-margin slot routes.

      The risk for these companies is dependent on a single market. Their strengths are principal owners who are lifelong residents of that market and experienced casino managers.

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