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The New Paradigm

Investing in gaming stocks is no longer as easy as picking the most successful casino or slot machine

The New Paradigm

Investing in gaming stocks was once pretty simple, at least in terms of the menu of choices.

Basically, there were relatively big companies based in Las Vegas, and riverboat casinos in the central part of the country. And there were the slot machine companies, but only three that mattered for American investors.

Of course, there were other companies, such as internet operators and suppliers and foreign-based casino and slot companies, but the former were penny stocks and the latter not of interest to investors limited to U.S. stocks.

The menu is much longer today. Consider:

• Las Vegas-centric. This is one category that has shrunk thanks to consolidation, and as Las Vegas Sands and Wynn Resorts became Asian plays.

Today, the only name is MGM Resorts. But that can change when Caesars Entertainment becomes public again, and depending on what companies move into the market.

The investment thesis is that MGM will ride the Las Vegas recovery, and that its balance sheet, while still having issues to resolve, thus presenting risk, is past the crisis stage.

• Las Vegas locals. At present, this is one name, too—Boyd. But that also may change if some of the private operators decide to go public, such as Station, Herbst, Millennium and others.

Unfortunately, the locals market continues to suffer as the Las Vegas economy stays at the bottom. In fact, a case can be made that conditions are worsening as out-of-bankruptcy Station becomes an aggressive marketer, and more Strip casinos than ever are pitching to locals.

• Regional. The riverboats have morphed. And the number of casinos has grown as racinos and slot parlors have proliferated.

But the number of significant public players is pretty steady: Penn National, the biggest of the regionals with the biggest growth pipeline. Pinnacle, the margin-improvement story with a growth kicker. Ameristar, Boyd and Isle of Capri, all ready to watch growing revenues fall to the bottom line after years of belt-tightening.

There are a number of very small regional operators that may grow into investible companies for funds, and are always available to individual investors. Ones to watch: Full House Resorts, Lyle Berman’s Lakes Entertainment and Nevada Gold & Casinos.

• Macau. Stanley Ho once owned them all, but now there are six Macau operators, all public—Ho’s SJM, Las Vegas Sands, Wynn Resorts, Galaxy Entertainment, Melco Crown, MGM Resorts. And a couple of these have pure Macau subsidiaries trading in Hong Kong, like LVS’ Sands China and Wynn Macau. MGM hopes soon to follow.

There are other ways to play Macau. Among the more interesting is Asian Entertainment, which rents out high-end rooms and fills them with VIP players.

• International. This field once meant land-based casinos and betting shops. Today, it more often means internet, and i-gaming is changing fast.

Land-based companies of various kinds find that their internet operations are their fastest growing, such as bookmaker William Hill and casino operator Ladbrokes.

Then there are the pure online plays like PartyGaming and 888 Holdings.

And the landscape is changing. European Union countries that once limited i-gaming to a state-sanctioned monopoly are opening to competition; software companies are becoming operators, or are aggregating operators under their own banners to get a critical mass of players.

I-gamers represent a challenge to investors, given the multiple jurisdictions in which they operate, and even their own countries of origin, from Sweden to Austria to Britain, and around the globe.

What is certain is that i-gaming in its various forms continues to grow and attract the interest of land-based companies.

Of all the internet companies, one that may be especially interesting to American investors is London-listed Betfair, which has pioneered peer-to-peer sports wagering in what are called betting exchanges.

One reason is that Betfair has arrived in the United States and purchased the TVG account wagering system just as New Jersey and California have legalized betting exchanges on horse racing. And when two major states legalize, others are sure to follow.

• International land-based. It isn’t just American companies that can do business outside their borders.

The pattern is increasingly common throughout the world, whether it’s Spain’s Codere in Latin America, Greek lottery operator Intralot in the U.S., Crown in Macau through partly owned Melco Crown, or giant Genting with global ambitions as big as those of Caesars, MGM or Las Vegas Sands.

There also are small companies with niches, again more apt for individual investors than many funds. Examples are NagaCorp and Entertainment Gaming Asia.

NagaCorp owns Naga World in Cambodia and has a gaming monopoly in a radius around the national capital, Phnom Penh. That is an interesting position to occupy for anyone who thinks Cambodia is an economy about to take off.

Entertainment Gaming Asia is the former Elixir. It runs slots at Naga World and other slot parlors throughout Southeast Asia and, while the company has struggled through its various incarnations, it now appears to have found its footing.

Interestingly, EGT trades in the U.S., just like Asian Entertainment, as well as in Hong Kong, another indication of the increasing globalization, even among micro caps.

• Gaming technology. Slot machine companies have evolved into technology companies, and are being joined by new players of varying kinds.

We’ll report on them in detail next month.


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