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Smaller is Bigger

Smaller, regional operators are turning around their fortunes as people begin to spend again

Smaller is Bigger

Fourth quarter earnings report season has ended, and, for the first time in years, regional casino companies had good news to share.

December and January gaming revenues were ahead of the previous year. Some of that was thanks to better weather. But a lot of the improvement was customers finally returning to casinos. With consumer sentiment at its highest level in years, it appears that more people are ready to spend on experiencing a good time.

That news has reached investors. As of this writing, stocks of Penn National, Boyd, Isle of Capri and Monarch are at or near 52-week highs. Better-than-expected performance prompted analysts to raise earnings forecasts and target prices on PENN and Gaming and Leisure Properties.

And with casino companies having reduced their cost structures, higher revenues should significantly increase profitability. Their stocks have a lot of room to run in that environment.

There also is a fair amount of company-specific good news.

Isle of Capri has enjoyed impressive revenue growth, up now four straight months. Golden Nugget debuted in Lake Charles in December and the Boyd, ISLE and PNK properties there did just fine as the new resort opened with barely a nibble of cannibalization.

That is especially good for PNK, given concerns that the Nugget would hit hard at its L’Aberge casino. Instead, former PNK CEO Dan Lee’s premise for building adjacent upscale resorts might prove true—it grows the market.

Then there is investor buzz over PNK spinning its real estate off into an REIT and BYD considering the same. Monarch serves two underappreciated markets, Reno and Denver.

It isn’t too far fetched to say that Reno will become a boom town with Tesla moving in, Apple there and the outdoors lifestyle that could prove compelling to Silicon Valley types now that Elon Musk and Apple have given their imprimatur.

In Colorado, MCRI is renovating its Monarch casino and, more important, plans a luxury quality hotel that it thinks can generate the kind of EBITDA done by Ameristar, the only other full resort property in Black Hawk. That would mean $60 million a year, a game-changer for a small company.

PNK, PENN, BYD and even ISLE get a lot of ink as the biggest regional operators, but there are some small names that have fallen out of favor and are unlikely to grab as much attention in the recovery. They have lots of numbers in their reports that aren’t pretty, but each is small enough that a turnaround in their stock prices can happen quickly. And all have stocks well below their highs.

Here are a few observations about them:

• Full House has challenges in each of its markets. But can anyone doubt that Dan Lee won’t bring material operational improvement to FLL now that he is CEO? His track record at taking over a then-very-troubled Pinnacle is a hint.

Lee has offered a couple more hints in his early days at FLL.

In Mississippi, he has made some quick modifications to the hotel being built at Silver Slipper casino that his investment group had criticized. Though the $30 million hotel is nearly complete, Lee is adding nine high-roller suites at the casino, which is the closest Gulf Coast property to New Orleans.

He also has hired his longtime investment relations director at Pinnacle, Lewis Fanger, away from the same role at Wynn to become CFO at Full House.

• Lakes Entertainment’s strategy has always been somewhat fuzzy, but that has recently changed as Lakes is merging with Golden Gaming to form Golden Entertainment, a new publicly traded company.

LACO had simplified its operations and finances in recent years under founder-CEO Lyle Berman, and its new Rocky Gap casino in Western Maryland is catching on.

Now, with Golden CEO Blake Sartini stepping in to replace Berman, who will remain a major shareholder and board member, the company will get both youthful ambition and geographic and business-line diversity. Golden operates a network of successful taverns with limited licenses, and slot routes and small casinos in Nevada.

More important, Lakes brings more than $70 million in net cash, thus providing the financial wherewithal for Golden to expand.

• Eldorado Resorts is another small Nevada casino operator that has gotten geographic diversity through merger.

The Reno-based casino operator merged with MTR Gaming to become a publicly traded operator of casinos in Ohio, Pennsylvania and West Virginia, as well as its casinos in Reno and Shreveport, Louisiana. One caution is debt, but ERI intends to pay that down rapidly.

ERI also has steady leadership under major shareholder and CEO Gary Carano, has the coming Reno boom, and has the proven ability to improve margins in the kinds of markets MTR occupies.

These companies are so small that they have limited analyst coverage—Chad Beynon of Macquire being one exception. He covers ERI and FLL. Likewise, institutional investors stay away from them because of their low trading volume.

The low level of institutional investment means they aren’t there to drive up the stock prices.

But the lack of analyst coverage can be a positive for individual investors if they do their homework, find that the story works for them, and can jump in before the big players on Wall Street.

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