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Slipping and Sliding

The "recovery" isn't steady and it isn't even. What's happening?

Slipping and Sliding

The year 2011 was one of uneven recovery for the American gaming industry.

Gaming revenues grew through most of the year, then slipped in the fourth quarter, but they roared back in December with a vigor not seen since before the recession.

Here are some examples of the great end to 2012:

• Atlantic City revenue grew 4.25 percent, breaking a 39-month losing streak.

• Detroit surged 10.01 percent, the biggest gain since April 2008.

• Illinois leaped 32.03 percent on the opening of Rivers Casino in the Chicago suburb of Des Plaines, but even factoring out Rivers, gaming revenues grew in a state that had declined steadily for several years.

• Indiana grew 2.4 percent, the best showing since October 2009, and that despite Rivers taking away some northwest Indiana customers and Caesars’ Horseshoe Southern Indiana losing Kentucky patrons to a bridge closing.

• Iowa jumped 16.05 percent, the best showing since May 2008. Much of that came because of the addition of the new Grand Falls Casino, but even without it, revenues leapt 11.49 percent.

And so recovery went throughout the country. Even the Las Vegas locals market gained 7.25 percent in November, the latest month reported as of this writing.

Obviously, the calendar helped in December with one more weekend date. And weather throughout the nation was better than the previous year.

But it is just as obvious that gaming is genuinely recovering.

Economists and pundits are divided about how well the national economic recovery will continue in 2012, but let’s assume it does continue. Who then benefits?

The answer is just about everybody. And that is especially true as we head into a big gaming expansion year with casinos opening in Kansas, Louisiana, Maryland, Ohio and Atlantic City.

If business grows as we expect, stock prices should follow, because gaming stocks were beaten down during the recession and never fully recovered.

And while the case can be made that some of the good news is in the stock prices, human nature is such that when the profits begin to flow, many investors will jump in.

In other words, now might be a good time to assess opportunities.

Gaming expansion is an obvious benefit to suppliers such as IGT, Bally, WMS, Aristocrat, Shuffle Master, Multimedia Games and others.

Brian McGill of Janney Capital calculates that expansions will add 25,224 new slot sales this year, plus leases of 4,750 at Maryland Live! when it opens. Replacement sales should grow 10 percent over last year to 55,000, he thinks.

Expansion adds only 4,950 games next year, McGill says.

But that is the lowest probable figure. In fact, we can expect Ohio and Illinois VLTs to begin coming online through 2013 and beyond. And then Massachusetts kicks in, and maybe New York and Kentucky.

Slot machine companies also are poised to enjoy two other benefits—their share of the rise in casino revenues, and the growing market for replacement games that both an improved economy and aging slot floors will spur.

Obviously, higher gaming revenue means increased revenues from games placed on participation leases, or what the slot companies call gaming operations.

 Gaming ops has been of increasing value to the major slot companies for a number of years, and remains an especially big part of IGT’s business.

And gaming expansion will grow the recurring revenue base, whether of machines on participation leases, or monthly rentals of card shufflers and table games by Shuffle Master.

Greater prosperity, growing competition and improving technology in the face of aging slot floors will drive sales of replacement machines, which actually have been growing modestly over the past two years.

McGill estimates 55,000 replacement sales this year, up 10 percent from 2011.

All of that expansion is more of a mixed bag for casino operators as new properties cannibalize existing ones.

How much cannibalization affects any one company or property is always subject to speculation until a new casino has been open a while.

In the case of Rivers Casino in Des Plaines, Illinois, for example, revenues at surrounding casinos sank significantly after its summer opening. But by December, most properties were growing again.

In the Middle Atlantic, much of the damage has been done to Atlantic City, and new casinos, such as Genting’s Resorts World at Aqueduct, are likely to cannibalize each other more than Atlantic City.

Still, a continuing recovery in gaming revenues will mitigate much of the cannibalizing effect.

And a new casino offsets the loss of new competition.

Penn National, for example, would probably gladly trade the gains it will get from opening two casinos in Ohio for the losses it will suffer in Baton Rouge as Pinnacle opens its new casino to complete with Penn’s Hollywood.

In addition, casino operators have long talked about how they had cut expenses during the recession so that added revenues would fall disproportionately to the bottom line.

We saw some of that effect in third quarter earnings. There’s no reason to believe we shouldn’t see it throughout 2012 if the revenue recovery continues.


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