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The Good Times Roll

Many gaming stocks have hit 52-week highs; is time to cash in?

The Good Times Roll

The stock market has had a great run as of this writing, and gaming stocks have done even better.

Many have hit new highs repeatedly. Fantini’s North American Gaming Index rose 29.96 percent year-to-date through September, far outperforming the overall market. Our World Index did even better, up 39.52 percent.

Here’s a list of U.S. gaming stocks recently hitting 52-week closing highs: Boyd Gaming, Caesars Entertainment, Churchill Downs, Eldorado Resorts, Galaxy Gaming, Golden Entertainment, Las Vegas Sands, Melco Resorts, Monarch Casino, Penn National Gaming, Pinnacle Entertainment, Scientific Games and Wynn Resorts.

Even stocks not at or right next to their 52-week highs still hit those highs recently and haven’t fallen back much from them, such as MGM Resorts, MGM Growth Properties and Everi.

Some of these gains have been simply spectacular. Scientific Games, at $8.72 when Kevin Sheehan became CEO in the summer of 2016, is near $46 as of this writing, a 550 percent rocket ride.

Some are clearly stories of troubled companies that have cleared their paths ahead. Caesars, long burdened by debt, has been reorganized under a much lighter debt structure.

Galaxy Gaming, long limited in expansion plans, is now Nevada licensed under new CEO Todd Cravens, and is ready to enter new jurisdictions.

But a lot of the growth appears based on a general feeling of well-being and confidence in the future as the economy is giving the gaming industry a prolonged period of steady growth.

So the question for investors: Is it time to take profits and put some money aside for a rainy day?

The future will tell us the answer, but for now, economic trends remain encouraging and valuations are not stretched.


Boyd, A Steady Grower

We’ve mentioned Boyd Gaming several times in this space as a company that appears to have a steady growth plan.

The company recently demonstrated that in its second quarter—while earnings missed analyst consensus, overall performance and corporate activities showed underlying strength.

Among the positives:

  • Operating margins in the Las Vegas locals markets improved 3.3 percent in the quarter. Part of the rationale for buying Cannery, East Side Cannery and Aliante casinos is that they operated at low margins, which Boyd can improve.
  • Returning capital to shareholders. BYD initiated a 5-cent quarterly dividend, bought back 600,000 shares in the quarter and intends to complete the remaining $77 million in buyback authorization in 12 to 18 months.
  • Lower debt. Boyd had paid down $92 million in debt this year and expects to get its debt-to-EBITDA ratio into the four- to five-times range next year.
  • Property improvements. While Boyd is paying down debt, it is also investing in upgrading properties, a necessary move for growth.
  • Las Vegas Valley. Gaming revenue growth in the Las Vegas Valley appears to be accelerating.

Unlike most states, Nevada reports revenues by area, not by property, but July numbers suggest a strong month for Boyd.

With last year’s acquisitions, the Las Vegas Valley now generates about 45 percent of the company’s gaming revenue. The locals markets and Downtown Las Vegas grew revenues $25.122 million in July, a combined 12.07 percent. Assuming Boyd has 30- to 40 percent of those markets, and assuming it shared proportional growth, the inference is that BYD grew revenues by a healthy amount.

A combination of higher revenues and higher margins obviously means an even better bottom-line improvement.

Boyd stock is near its 52-week high, and at 17 times next year’s earnings, it isn’t overly cheap. But it also isn’t expensive. Boyd appears to be early in a story that will develop over several years.


Exogenous Events

Sometimes, things happen that you cannot predict.

In investing, they are called exogenous events. They disrupt the business model but, because they come from outside an organization and cannot be predicted, they are not factored into the model or financial forecasts.

The American casino industry has had several of them recently.

Hurricane, then Tropical Storm, Harvey, was an exogenous event that dampened business in western Louisiana in late summer.

The tragic October shooting at Mandalay Bay in Las Vegas could cause some prospective visitors to pass on major events, though that is just speculation at this point.

We don’t know how these events will play out. In Louisiana, the economic disruption of flooded eastern Texas might keep many players at home, but the influx of wage-earning recovery workers might offset that.

In Las Vegas, MGM Resorts might operate at less than full capacity for a short time, but similar events in other cities in the past have not demonstrated a long-term impact. And, no doubt, no one else will ever again get away with amassing an arsenal of weapons inside a hotel, casino or otherwise.

Such exogenous events are relatively small and their effects are of short duration.

But they are reminders that nothing is certain. And, much like the item above about the good times rolling for casino stocks, investors would be wise to have some cash on hand for the day when the good times no longer roll, or the exogenous event is seriously damaging.

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