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The Eagles Soar

Regional casino companies are becoming investor favorites because of Covid cost-cutting, sports betting and iGaming

The Eagles Soar

A year ago, the world of U.S. regional casino operators wasn’t very exciting.

Oh, there was the usual emphasis on cost reductions, on refining marketing, on tweaking a property here, planning to convert a riverboat into land-based gaming there. And sports betting was starting to roll out with some promise of future growth.

My, how things have changed.

Today, regional casino companies are rocking. They are the growth darlings of the gaming industry. While the Las Vegas Strip, Macau and other markets continue to await Covid travel recovery, the regionals are raking.  

Stocks like Penn National, Boyd and Churchill Downs hit highs after highs.

Here are several reasons for the transformation of several regional companies from dull ducks into regal eagles.

  • Sports betting is arriving fast, and the numbers are impressive for companies that have built their alliances, such as Penn National with Barstool Sports and Boyd with Flutter’s FanDuel, in which it also has a 5 percent stake.
  • iGaming is proliferating, too. Again, companies like Boyd, Rush Street Interactive and Golden Nugget Online are showing the potential in this space.

And Boyd, for one, is stepping up the pace, soon launching its own iGaming brand reviving a storied name in Stardust iCasino.

Interestingly, DraftKings is growing its iGaming business rapidly as it converts sports bettors into online casino gamblers. It is worth noting that, while sports betting makes most of the headlines, casino games generate higher margins and the market is bigger—lots of women—as opposed to sports betting, which tends to skew very heavily towards male participation.

  • Margins, which CEOs and CFOs a year ago touted as improving, are skyrocketing thanks to Covid-motivated cost cutting. As examples, Penn National’s EBITDA margins improved a phenomenal 7.2 percent in the fourth quarter at reopened properties. Boyd grew 5.8 percentage points to a record 33.1 percent.

The impact of these three developments cannot be understated. Consider New Jersey. In January, which was the latest month of data available as of this writing, iGaming and sports betting revenues combined for $184 million, which exceeded legacy casino revenue of $160 million. iGaming, a more reliable number than sports betting, which is very seasonal, was $103 million. That annualizes to more than $1.2 billion.

New Jersey, Pennsylvania and just the first 10 days of brand-new Michigan iGaming and sports betting saw MGM generate $53 million in revenue, Penn National $47 million, Boyd $35.5 million, Golden Nugget Online $31.5 million and Rush Street Interactive $26 million.

Extrapolate those number to all of the markets that will be opening and as they mature. The impact will be significant.

One caution is that acquiring online customers is not cheap. Those customers are fickle, playing with you today and playing with your competitor tomorrow if he offers a better deal.

That fickleness, however, is where companies with giant databases have an advantage. Penn National, Boyd, Caesars, DraftKings, Flutter’s FanDuel and MGM all have databases of tens of millions of their proven customers to mine and national networks of brick-and-mortar casinos they can cross-market. That both helps reduce cost of player acquisition and contributes to growing revenues, including in brick-and-mortar facilities for the casino companies.

Improved margins are less exciting but important.

No doubt, expenses will grow and margins will decline as casinos fully reopen. But also no doubt, casino companies have learned how to manage at much lower costs.

The impact can be significant. Eric Green, chief investment officer at Penn Capital, noted in his Investor Insights video interview, presented by Fantini Research, that if Golden Entertainment can retain half of its improved margins, EBITDA would grow from an expected $200 million to $250 million, and a $20 stock would generate $4 a share in free cash flow. Green’s interview in which he discusses his best investment ideas, can be viewed at FantiniResearch.com (click Investor Insights). Assuming a stock can reasonably be expected to sell at 10 times free cash flow, the potential impact is clear.

Margin improvement has another benefit. It improves the balance sheet. Even if the additional EBITDA created by operating more efficiently is not used to pay down debt, the mounting cash reduces net debt, thus improving metrics like debt-to-EBITDA and enterprise value-to-EBITDA.

Caesars CEO Tom Reeg is frequently quoted as saying the new age of online gaming is similar to the opening of the U.S. heartland to casinos during the riverboat expansion of a generation ago.

Interestingly, it is the beneficiaries of that era—Caesars, Penn National, Boyd among them—that are benefiting from the new gold rush, too.

More parochially, Covid-19 and high taxes are accelerating the growth of Sun Belt states and secondary metropolitan areas such as Miami, Houston and Denver.

That will benefit casino markets such as Biloxi, Lake Charles and Black Hawk-Central City.

But the biggest gainers are southern Nevada and Reno, which are convenient to a huge population of disaffected Californians.

Once again, this is to the benefit of regional casino operators such as Boyd, Red Rock Resorts, Monarch Casino and Golden Entertainment.

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