Sanguinity

The inclination to believe in the most favorable outcome: Merriam-Webster

Sanguinity

Sanguinity seems to sum up the nearly universal attitude of CEOs as they assessed the outlook for their companies in third-quarter investor conference calls: U.S. consumers appear healthy. Las Vegas is strong and growing. Macau’s VIP weakness is just temporary, and the future belongs to the booming mid and premium mass markets, anyway. Mergers and acquisitions have a long way to run and will continue to drive valuations higher. Sports betting is opening new revenue streams and driving on-property traffic. Debt ratios are coming down. Expansion projects are penciling out for 15 percent and 20 percent returns on investment. Japan is around the corner.

If there was a negative thought, it is that the economy might be slowing, but even then CEOs don’t see a Great Recession-like downturn, and their companies are running leaner and are better prepared than last time, they said.

With that as the backdrop, here are some observations:

  • The sale of Bellagio real estate to Blackstone for $4.2 billion has generated excitement over new capital entering gaming and is seen as evidence that smart money sees the value of Las Vegas Strip properties.

That is a compelling idea and seems likely to be correct. However, a cautionary note: one sign of a top is when outsiders start coming in and pay top dollar for entry.

  • Japan. Las Vegas Sands and Wynn, two companies considered slam dunks to pitch mega resorts to the Japanese government, have become the first major companies to also say they might not bid for licenses if the economics don’t look right.

I’ve been somewhat skeptical of Japan. The country is ambivalent, if not downright divided, about whether it wants casinos. That ambivalence has resulted in a very drawn-out process. Remember when many observers thought Japan would have casinos in time for the 2020 Olympics? Now, they’re abuzz about being open for the 2025 Japan World Expo.

They might be right this time, given that a law and a selection process are in place. But the ambivalence can still result in economics that don’t make sense. If not, Las Vegas Sands might look very wise focusing $5.5 billion in Singapore and Macau expansions and seeking out other potential mega markets like Brazil.

  • Japan prediction. MGM Resorts will win one of the three licenses. The company has a clear strategy, is willing to invest the $10 billion or so the Japanese may require, and has a more collegial approach that can attract Japanese approval. MGM is also one of the best known brands in Japan, thanks to the MGM movie studio.
  • MGM Resorts: the lion is roaring. Talking about MGM, the company appears to have adopted both a visionary strategy and a commitment to rewarding shareholders in its asset-light model demonstrated by the Bellagio sale and the intended sale of MGM Grand.

CEO Jim Murren explains the sales as replacing static real estate with money that can finance more kinetic growth for an entertainment company.

 

Nevada Triple Play Redux

Nevada Triple Play Plus One. A few years ago, I wrote about the exciting prospects for the stocks of three small family-controlled Nevada-based casino companies—Monarch Casino, Eldorado Resorts, Golden Entertainment. Later, Full House Resorts was added as Plus One.

The results have been pretty darn good.

Since that initial report in April 2016, Full House is up 90 percent. Monarch 2.3 times, Eldorado 3.8 times and Golden 25 percent.

And, yet, their growth appears to be far from done. Here’s a brief update:

  • Eldorado stock has gone from $13 to $50 as of this writing. It has also transformed from a small Reno-centric company into what will be the largest casino operator in the U.S. by number of properties when it closes on the purchase of Caesars early in 2020.

Analysts put future value of Eldorado north of $58 a share, though some see a bull case for $80-plus.

Here’s my view: Eldorado has a record of execution. When CEO Tom Reeg says he is supremely confident in gaining the targeted $500 million in synergies from the deal, you can take it to the bank that he will exceed that number.

And when he talks about the ability to monetize Caesars’ assets and generate revenues by introducing Caesars’ vaunted player rewards programs to new markets, his outlook sounds very credible.

  • Full House Resorts has shot up from $1.60 to around $3. There is reason to believe Full House can reach $5 as it implements sports betting.

The sports betting deals it has signed for Indiana and Colorado do more than fatten the bottom line. They provide funds that can help Full House go out and get more funds to finance the transformation of Bronco Billy’s in Cripple Creek, Colorado, into a small destination resort. And if that produces the results CEO Dan Lee thinks it can, a stock price in double digits is reasonable in several years.

  • Golden has had the wildest ride, jumping from around $12 to nearly $35 on optimism about what it would do with the Stratosphere in Las Vegas, to plunging back to around $12 on disappointing earnings and fear that the Strat was just a dream.

However, the story has not changed and, indeed, has gotten better with the acquisition of 40 percent of the Laughlin, Nevada, market.

With its STRAT renovation nearly behind, Golden now gets to execute on raising property performance, cross-marketing its properties to a big locals customer base at 130 locations, and to generate free cash flow.

If Golden succeeds, the stock price, now over $15, could return to the mid $30s, then beyond.

  • Monarch is finally about to open its transformation of Monarch in Black Hawk, Colorado, into a destination-quality resort. That could lift the stock from around $44 to perhaps $50 if the property achieves targeted returns.

It will also give balance sheet-oriented CEO John Farahi the free cash flow to pay down debt rapidly and position Monarch for its next growth project. The question will be what, where and when for the stock price to make its next turn up.

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