Surprise, Surprise

The second quarter earnings season is over, and taught us many lessons

Surprise, Surprise

The second-quarter earnings season has ended for the largest U.S. gaming companies as of this writing, and it brought some interesting surprises.

Macau gaming revenues continued to grow double digits and are expected to continue to do so. But growth has slowed from what was probably an unsustainable pace. The result: the stocks of the two most Macau-exposed casino operators, Wynn Resorts and Las Vegas Sands, fell 8 percent and 11 percent, respectively, from the time they reported their second quarters.

Interestingly, the prospects for both companies in Macau appear strong. Wynn Palace is ramping up, and the city’s transportation infrastructure improvements that disrupted access to Wynn Palace while under construction are about to start delivering customers to Wynn’s front door.

Las Vegas Sands, with Macau’s biggest hotel inventory, is positioned to benefit from ever-growing Chinese visitation to the city that is fast transforming into East Asia’s entertainment capital.

Indeed, Las Vegas Sands COO Rob Goldstein was downright Sheldon Adelson-ish on the company’s quarterly investor call.

Goldstein cited market share growth in a growing market, forecast 20 percent and 30 percent returns from planned hotel renovations and expansions, pointing to similar results at recently renovated Venetian rooms as the model, and cited continuing VIP improvement.

Most of all, Goldstein crowed about the big and rapid growth in visitation from affluent Chinese customers outside of nearby Guangdong province.

Those many millions of affluent Chinese are the future, Goldstein exclaimed.

Meanwhile, back in the more mundane world of U.S. regional casinos, Penn National, Boyd Gaming and Eldorado Resorts were announcing results that were anything but mundane.

Basically, they hit home runs. The result? They sold off. Penn National’s stock lost 8 percent, Boyd 6 percent and Eldorado 6 percent in the following days.

Even with the sell-off, regional casino stocks trade significantly higher than their historic levels of seven to eight times EBITDA. But they are not overvalued, and these three have intrinsic strengths:

  • A healthy U.S. economy. And with Eldorado and Boyd’s Nevada and Southern states exposure, they stand to benefit long-term from Sun Belt growth.
  • Experienced management teams that are still young enough to give investors the combination of prudence and ambition.
  • Improving underlying financial strength as they wring out expenses from acquired properties, grow operating margins and improve their balance sheets.
  • Proliferation of legal sports betting, and likely mobile and online gaming to follow, that will both create new revenue streams and draw customers to their brick-and-mortar casinos.

These are characteristics that should appeal to true long-term investors. And the same can be said for smaller regional companies like Monarch and Golden Entertainment.

 

Sliding Into Third

Caesars and MGM Resorts delivered something of a one-two punch when they forecast within 24 hours of each other that the third quarter will be soft in Las Vegas.

Both companies emphasized that the quarter will be an exception brought on more by comparison to an unusually strong events calendar last year than to long-term weakness.

Fourth-quarter bookings show a rebound. MGM said it lost 100,000 room nights in the third quarter but that the fourth quarter is up 77,000. That is encouraging, but the counter argument can be made that last year’s fourth quarter was unusually weak as many customers stayed away after the Mandalay Bay shootings.

However, there is no doubt the number of major events was much greater last year.

Many factors go into visitation, and this is no analysis of them, but it might be asked whether parking and resort fees are slowly degrading the Las Vegas experience. Customers once excited to be in Sin City now might feel like they’re being nickeled and dimed (or more like it, double-sawbucked) out of the fun.

On MGM’s quarterly conference call, CEO Jim Murren noted weakness is in mid-market properties, not upscale Bellagio and Aria. That would be consistent with less affluent customers feeling the sting of the fees.

At one point, Murren said, “What we don’t want to do is anything that diminishes the customer experience, because then they won’t be coming back.”

It might just be that resort and parking fees, especially as they rise to the point of taking a significant bite out of mid-market customer budgets, do just that.

It is interesting that Wynn, the most upscale of all Las Vegas casino companies, has eliminated parking fees for hotel guests and for customers spending more than $50.

 

Maturation Of A CEO

We’ve observed in the past couple of years that Murren appears to have grown into his CEO role.

A guy who once talked about art and creating urban development in Las Vegas, Murren now talks about profitability and rewarding shareholders.

More than any other Las Vegas casino operator, MGM has talked about RevPAR as an important measure. Investor conference calls have long featured recitation of hotel statistics.

On the most recent call, when some sell-side analysts complained about being surprised by the upcoming third-quarter softness, Murren snapped back, “We’re getting kind of weary of talking about RevPAR because that isn’t the metric by which we measure ourselves. It’s profitability,” he said.

“Hotel business is but one of our many cash registers,” Murren said in noting that MGM is a gaming and entertainment company.

Those are words a gaming investor wants to hear from the guy with whom he’s entrusting money.

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