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Taking the Plunge

If January is any indication-and it often is-things are looking up in the gaming industry

Taking the Plunge

Now that we’re comfortably—except for the darn cold and blizzards—into 2011, we have some information on which to sense how the year will go.

As this is an investment column, we’ll start with stocks.

Just about everyone knows about the January effect. If stocks rise in January, they’re likely to be up for the year as a whole, the theory goes. And it usually works out that way.

Of course, the January effect is a bit of a self-reinforcing predictor, as one-twelfth of the year is already built into it.

Nevertheless, January was good for gaming stocks. Applied Analytics, the Las Vegas research and consulting firm, saw its gaming industry stock index rise 24.5 points in January to 440.5, so we’ll root for the January effect to be real this year.

Another encouraging sign for the casino industry is the return of group travel and conventions, with increased pricing and a dearth of new capacity expected to drive room rates and revPAR this year and next.

Revived group business is good for every casino with a hotel and meeting space, but it obviously is most important for those companies that have considerable convention facilities and reside in convention towns.

And no city is more of a convention town than Las Vegas.

A few years ago, there were several companies to play for the recovery in Las Vegas convention business, but today, there is basically one—MGM Resorts.

Las Vegas Sands is a big convention operator, but Las Vegas is no longer the needle-mover at LVS. It’s Asia.

In the fourth quarter, the mighty Venetian and Palazzo in Las Vegas generated $80.6 million in EBITDA. Not bad for coming out of a recession.

But Macau generated $341.2 million and LVS’ single Singapore resort produced $305.8 million—and it is still not a fully developed project.

Some analysts project that in two years, LVS will produce $4 billion in EBITDA, of which $1.5 billion will come from Marina Bay Sands in Singapore alone.

So, while LVS will gladly grow EBITDA in Las Vegas, the stock price depends on Macau and Singapore.

And what is true for LVS is true for Wynn, another company for which Las Vegas is less important.

But MGM is the opposite. It gets most of its EBITDA from the Las Vegas Strip, and it has the convention facilities to capitalize on the recovery in the group market.

It also is worth noting that the big comeback is in upscale and luxury properties. MGM has plenty of that inventory.

The power of recovery is in room rates. Because rooms are basically a fixed cost, every dollar of rate increase falls to the bottom line.

And when you have about 40,000 hotel rooms operating at 90 percent capacity 365 days a year, the effect of higher rates can be staggering.

Multiply that more than 13 million room nights by rate increases of $10 or $50 or $100, and that’s $130 million, $650 million and $1.3 billion, and nearly all of it becomes cash flow.

And this doesn’t consider the free spending of a high percentage of conventioneers while they are on property.

There is a fair amount of caution on MGM because of the huge debt it piled up and the write-downs at CityCenter.

But the worry may be a few years late. Heading into CityCenter, it should have been obvious that Las Vegas was in a boom that had to bust, and that CityCenter was the riskiest of all.

But the property is open now. The write-downs have been taken. And while there are still issues about debt to be resolved, the critical actions have been taken, and neither lenders nor MGM management are about to let the company be undone by remaining challenges.

 Meanwhile, a recovery is taking place. And it is taking place in a way that can be especially beneficial to MGM.

So, this may be a time to step in—when others are cautious and a recovery is under way.

The big caveat, of course, is whether the recovery continues, and there are skeptics who think it will disappear when the federal pump-priming ends.

But that is a risk to be assessed, which is what investing is all about.

 There is another caveat—growth. Investors love growth, but growth in itself doesn’t make for a good investment. Value does. Return on equity does.

University of Pennsylvania professor Jeremy Siegel once tracked stocks for a 50-year period and discovered that stodgy old companies like Standard Oil of New Jersey, now Exxon, gave far bigger returns to investors than great growth stocks like IBM.

One reason was dividends. But a bigger reason is that investors, excited by growth, paid up for it.

And that brings us to regional casino companies.

Not much revenue growth is expected in regional casino markets this year, and that may be the case.

But there are what might be called stealth investments. Ameristar might be one. It doesn’t enjoy much revenue growth, but it is steadily paying down debt, each year lowering interest cost, thus beefing up the bottom line at no expense.

Pinnacle might be another. Although it has a growth project in Baton Rouge, Pinnacle is, to a great extent, an efficiency opportunity. A company that has EBITDA margins in the teens that can move them over 20 percent is generating profit growth for shareholders.

Isle of Capri is another story of cost-cutting and blocking-and-tackling, though it now has a growth project in Missouri.

And Penn National might be the best of both worlds, value and growth.


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