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The End of the Golden Age

Gaming as a growth industry is fading. What takes its place?

The End of the Golden Age

Is the Golden Age of gaming growth just about over, and, if so, what are the implications for investors?

Gaming has been such a growth industry, with demand seemingly never satiated, that it seems almost preposterous to question whether this year’s deceleration is more than a speed bump.

After all, the Philippines is coming online with mega-resorts. Taiwan is jumping into the game. South Korea and Japan might, too. Latin America is booming. The Chinese behemoth is still early in its transformation into a 1.3 billion-population consumer market. Ditto India.

And, of course, there’s the internet.

Plus, the world will shake off economic doldrums at some point and good times will roll again.

What a wonderful world of growth opportunities. And so it is.

But not all growth is equal. Or more to the point, not all growth is equally profitable, or even profitable at all.

Two reasons are competition and the law of big numbers.

Competition: There comes a time when markets mature, and owning a casino is no longer a license to print money.

Consider the Northeastern United States. It has long been understood that the proliferation of casinos in the Middle Atlantic was draining Atlantic City and, to a lesser degree, Connecticut.

But now those new casinos are losing customers to even newer ones, such as Valley Forge’s effect on Philadelphia-area casinos, and Maryland Live! outside of Baltimore.

In Ohio, Hollywood Toledo has taken a bite out of Detroit casinos. Horseshoe Cleveland is clipping MTR Gaming’s Presque Isle Downs in Pennsylvania. And MTR’s new Scioto Downs in Columbus is hurting the casinos of southeastern Indiana.

And so it continues as markets now overlap each other.

The results are weaker bottom lines, speculation that some casinos might have to close in Atlantic City, and companies like Penn National spending millions to oppose additional casinos in Maryland.

The Law of Big Numbers: Internationally, everyone has been agog at Macau, which is approaching $40 billion in gaming revenues. That led to Singapore, where its two casinos will do more than $6 billion in revenues, or more than the Las Vegas Strip.

But even with these huge numbers, not all is well. Growth has slowed to a near standstill in Macau, and VIP play actually shrank in July.

And Singapore, after bursting into existence, is suddenly looking grown up, if not fully mature.

The reasons are often attributed to the slowdown in the Chinese economy, including tighter credit, which is used by junket operators to finance the high rollers they bring to Macau.

But it is also worth questioning whether the easy pickings have been made and the era of 40 percent growth is past.

Nor might the internet be an unlimited boom. The U.S. and other major jurisdictions might come online, dramatically lifting global revenue. But there will be a limit. Even now, some markets such as the United Kingdom are showing signs of maturity.

New markets could be like Singapore: Big splash, and then what?

And it is far from clear who the winners and losers will be online, as surely not everyone will prosper, even though, at this early stage, every prospective player optimistically boasts about its game plan.

And even in a world of big growth, there is also the law of big numbers. It is a very simple concept: the larger something gets, the less it can maintain its growth rate.

The clearest example is Macau. It has grown gaming revenues in a decade from $2.8 billion to approaching $40 billion. The same growth rate for the next decade would take those revenues past $500 billion, the equivalent of roughly 100 cities of Las Vegas.

That isn’t going to happen.

So, even if one buys the bullish scenarios that Macau will continue to grow, it will be at a slower rate.

This lesson applies to the world as a whole. Gaming can double, or even triple, but at some point, it slows to match overall economic growth.

So, where does that leave investors?

Two answers: dividends and stock-picking.

Dividends: Good companies reach the point where they generate more cash than they can reinvest at their accustomed rates of return.

That is the time to return that cash to shareholders through dividends.

A few years ago, American casino companies didn’t pay dividends. Today, an increasing number of them do, including two of the greatest growth stories in the industry, Wynn and Las Vegas Sands.

Expect the trend to grow.

Dividends aren’t exciting, but combined even with slow growth, they can provide a total return greater than glamorous growth stocks.

That point was famously illustrated some years ago by Wharton professor Jeremy Siegel in his book Stocks For The Long Run.

He tested back results for decades and found that the stocks of slow-growth dividend payers produced greater overall returns than sexy growth companies, assuming dividends were reinvested.

Put another way, if the thrill of exponential growth is over, sit back, relax and enjoy the power of slow growth with dividends.

Stock-picking becomes more important as overall growth slows.

The right company, picking its spots, can continue to grow faster than the industry.

Pinnacle and Penn National are examples of two regional casino operators that have managed to develop growth opportunities.

And Las Vegas Sands also might have plenty of growth ahead if it lands a couple mega-resort projects, such as in Spain, or in Southeast Asia, or if Japan happens.

Then there is the well-managed company that can grow returns in difficult environments. Ameristar fits that description.

So opportunities will continue as gaming growth slows, but investors will have to be selective.

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