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Show Me the Money

Growth stories need to be written—and demonstrated—by the companies

Show Me the Money

As we head into fourth-quarter earnings season, the theme for investors in casino stocks might be “Show me the money.”

With a couple of exceptions, namely Red Rock Resorts and Churchill Downs, no operator company appears to have a clear and compelling growth story. That doesn’t mean there isn’t growth in the works; it’s just that most growth stories are not as clear and compelling as they were in the days when gaming was spreading rapidly across the country and, until just about now, when online sports betting and iCasino were the rage.

The emphasis now is on how these more mature companies can combine selective growth with improving management of assets to move stock prices upward. Much of their improvement has been done in recent years through cost cutting, paying down debt, buying back stock and initiating dividends.

For investors, those improvements haven’t been enough. Gamers largely underperformed the stock market last year, in part carried along by the malaise in small caps, generally, with nervousness over the economy and what a recession would mean for the earnings of consumer-discretionary companies, and the aforementioned dearth of clear and compelling growth stories.

Given this environment, accompanied by a continuing nervousness over the economy regardless of the less hawkish-talking Fed and the bull run in big caps, especially of the tech variety, investors will be expecting casino operators to offer more proof of growth ahead.

Put most simply and bluntly, 2024 will be a time to put up.

With that as preface, here are some thoughts on what to look for in earnings reports and executives’ commentary on conference calls:

• The Big Four. Wynn, MGM Resorts and Las Vegas Sands all have benefited from the big comeback in Macau, and for Wynn, MGM and Caesars, from a banner fourth quarter in Las Vegas. We’ll be looking for signs that those improvements are not just sustainable, but are platforms to build upon in 2024. For MGM and Caesars, we’ll also be interested in hard numbers on growing online profitability.

• Regionals. Brick-and-mortar gaming revenues throughout the country have been choppy. It will be important for companies to show they can grow overall in this environment. This will be especially important for Penn Entertainment, which is subject of considerable skepticism over its online prospects, and for Boyd to show that its disappointing third quarter was a blip and not the start of a trend.

• Turning projects into profits, and a special situation. As mentioned, Red Rock Resorts and Churchill Downs have the clearest and most compelling growth strategies and pipelines. The trick will be to demonstrate their convertibility into growing profits. These may be two companies whose potential remains underappreciated.

Meanwhile, there is Bally. Historically, Bally is a middling regional operator but now it has two potentially transformational projects—development of a Chicago casino and whatever is built in Las Vegas in place of the Tropicana and adjacent to the coming A’s baseball stadium.

It’s too early to tell how either or both will play out, but we’ll be looking for evidence that management has credible plans.

Finally, there is Full House Resorts, which, so far, risks being the little engine that couldn’t. Full House has two potentially transformational new casinos in Waukegan outside Chicago and in introducing a relatively large, luxury property to Cripple Creek, Colorado.

Waukegan opened with less of a bang than hoped and has been stuck under $8 million a month in gaming revenue, a number that doesn’t inspire confidence that the yet-to-be-built permanent casino will provide a big return. Cripple Creek recently opened with snafus that caused hotel room cancellations on what should have been a celebratory New Year’s weekend, and with its most attractive amenities still to open.

If Full House delivers on much of the promise of those projects, the stock is a multi-bagger—but it has to execute to achieve that.

• Now what? Monarch Casino and Golden Entertainment are two small operators that are all dressed up with no apparent place to go. The good news is that they have built themselves into generators of considerable excess cash that is piling up on pristine balance sheets. That gives them what analysts euphemistically call optionality.

We’ll be looking for plans—specific growth strategies, cash cow-like returns to shareholders or, to use another investor euphemism, strategic alternatives. Absent some combination of those, Monarch’s and Golden’s stocks may be well-dressed plodders.

• Don’t tell me. Show me. This applies to all of the online sports betting and iCasino operators, whether divisions of companies such as Penn Entertainment, pure plays like Rush Street Interactive and DraftKings, or attendants to the industry such as affiliates and data providers.

This may be less a 2024 than a 2022 and 2023 story, as the stock prices of these companies have fallen from their giddy highs to disillusioned lows. But it will still be true that for any of them to advance significantly this year, they will have to put up more numbers than promises.

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