Gaming stocks enjoyed a summer rally as stocks ranging from Isle of Capri to Las Vegas Sands leaped 69 percent above their lows. Yet, there is a long way for them to go as they remain 70 percent below their 52-week highs.
Thus the question: is this a break-out in which stock prices can be sustained until industry fundamentals improve and carry them higher, or is it a bear trap for overly eager bulls?
We suspect that, for the immediate future, stocks have bounced back from way-too-low valuations, and should find some stable ground here.
But the intermediate outlook may be less sanguine. The reason? The economy.
Gaming stocks also have been hit hard for a variety of reasons that have nothing to do with the economy, such as smoking bans, and new competition cannibalizing rather than growing markets.
But the big hits across the United States have come from a drained consumer. As everyone knows, the American economy has not been in a recession. But the consumer has.
High gasoline and food prices have robbed consumers of discretionary income. The guy spending an extra $200 a month to fill his gas tank and another $200 more at the grocery store has just lost his play money.
And the bursting of the housing bubble hasn’t helped, eliminating the easy money from home refinancings and stirring a storm of worrisome news about crises in the financial industry sure to rattle consumer confidence.
Hopefully, most of the problems for home builders and buyers, mortgage lenders and banks is now behind, or at least a recovery can be discerned on the horizon.
But all of this slowing down in consumer spending is starting to affect jobs and factory orders, which means yet more effect on jobs. And that is the classic stuff of recessions.
We won’t try to divine whether we are in, or falling into, a recession. But it seems reasonable to expect that consumers aren’t likely to see much improvement in their situations for a while.
And, while avid gamblers continue to gamble, the economic environment is not one in which many of the newly attracted casino-goers will opt for the high-priced shows, dinners and hotel room rates that turbo-charged the business in recent years.
We note that two knowledgeable CEOs-Peter Carlino of Penn National and Jim Perry of Isle of Capri-recently said that the avid gambler is still showing up as he did in past recessions, though he may be spending less.
So, longer term, the casino industry will do well. People love to gamble. It is risk-taking as entertainment. And both risk-taking and entertainment are essential to people.
The economy will rebound. America has been a bull market for 400 years. That isn’t about to end in the land that still lionizes entrepreneurship and invention.
And Las Vegas will do well as long as the century-old trend of migration to the Sunbelt continues, America’s population grows, and the rest of the world becomes affluent.
But it may be a while between now and then.
Put another way, investors might not have to hurry back into gaming stocks for fear of missing the next bull run.
One reason that casino stocks rallied in July and August was the decline in gasoline prices. Indeed, casino stocks have performed in perfect inverse to the price of oil.
The next catalysts, at least for regional casinos, could be provided by the voters of Colorado and Missouri, and in the case of Lakes Entertainment, of Ohio.
In Colorado, voters will decide whether to increase the bet limit from $5 to $100, allow 24/7 gaming, permit roulette and craps, and freeze the tax rate.
In Missouri, voters get to repeal the $500 loss limit and, with it, what amounts to requiring people to register each time they enter a casino.
Polls in both states indicate voters favor liberalizing the gambling rules.
The changes would transform Colorado, making it possible to steal back many Denver players who now go to Las Vegas, or stay home.
Public companies with Colorado operations include Ameristar, Century Casinos, Isle of Capri, Penn National, and tiny Global Casinos, Inc.
Ameristar would benefit greatly as it is building the state’s only destination casino resort in Black Hawk.
Century would benefit immensely because Colorado represents more than a third of its business. Co-CEO Peter Hoetzinger recently said the company is already preparing to add table games quickly if the bet limit is lifted.
Isle of Capri also has a big presence in Black Hawk.
In Missouri, removing the loss limit would benefit all the operators. They include Ameristar, Isle of Capri, Penn National and Pinnacle.
Ameristar and Pinnacle might be the biggest winners because they have developed upscale properties to appeal to high rollers.
Estimates of the value of the repeal on both companies range from $1 to $3 a share. And, with big bets in both Colorado and Missouri, Ameristar could be a double winner.
For its part, Lakes is pushing a statewide referendum in Ohio to build a casino between Cincinnati and Columbus. By one estimate, that could add $5 to $10 a share to LACO’s stock.
Clearly, if the Colorado and Missouri referendums pass, they will be big plusses for a number of regional casino operators. And that should bring more attention to the stocks and their growth prospects.
Frank Fantini is the editor and publisher of Fantini’s Gaming Report. A free 30-day trial subscription is available by calling toll free: 1-866-683-4357 or online at www.gaminginvestments.com.