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Where Do We Go From Here?

Did we experience a false recovery or are we headed for a double-dip?

Where Do We Go From Here?

They don’t call it the dog days of summer for nothing.

The acceleration in gaming revenues that we saw in the spring has cooled down as the weather has heated up. Why and how that has happened is a matter of conjecture, but that small window of optimism we had during the spring has now closed tight.

That can be illustrated by looking at May revenues (the latest month of full national results as of the first week of July) compared to year-to-date through April.

Ameristar            -2.23%    +3.15
Boyd Gaming       -2.98       -0.26
Caesars Ent.        -7.47       -4.70
Isle of Capri         -2.22       +1.80
MTR                     -4.85       -0.73 
Peninsula Gaming +1.00      +2.35
Penn National       +5.38      +7.11
Pinnacle               +1.50      +10.03

In every case, the results deteriorated. It should be noted that the calculations above do not include Mississippi, Colorado and Nevada, which do not report revenues by property.

The question, of course, is where do we go from here?

If participants of our purely unscientific poll at www.fantinirsearch.com are right, improvement will not come soon.

Fifty percent of respondents said revenues will stay flat for the foreseeable future and 8.8 percent think there’s a chance we’ll double-dip.

Forty-one percent were more optimistic, saying the recent softness is just a bump in the road.

Of course, revenues don’t tell the whole story, especially among regional gaming companies. They have positioned themselves to prosper in a slow-growth environment.

Consider:

• Ameristar has restructured debt and brought down costs. With interest expenses running a little over $100 million a year, EBITDA well over $300 million and little in the way of capital expenditures, ASCA is in a position to pay down debt and send more revenue to the bottom line.

And the stock is cheap: as of this writing, a price-to-growth ratio of just 0.55, price to sales of 0.64 and enterprise value-to-EBITDA ratio of only 6.87.

And when revenues begin to grow, the cost-cutting will allow a greater proportion of the new money to convert to profit.

The big knock on Ameristar is increased competition, especially if five casinos are added in Chicagoland to take business away from its East Chicago, Indiana, casino.

But a punch to one property can be absorbed. And Ameristar can pursue one of the new Illinois licenses, turning a negative into a plus.

• Boyd faces the same challenges as the other regional gamers, and it has the weak Atlantic City and Las Vegas locals markets to contend with.

But it also has reduced expenses, and there are glimmers of light in the Las Vegas locals market, though the promotional environment there remains intense with even some of the Strip resorts pitching to locals.

• Isle of Capri is another case of working on the balance sheet and lowering expenses.

However, it also has two growth projects in the works: Cape Girardeau in southeast Missouri and Nemacolin Woodlands in Pennsylvania.

Neither is a big project, but Isle isn’t a big company, and both are relatively isolated from competition.

• Penn National, as everyone knows, is the purest domestic growth story.

It has three casino projects in the works—a Kansas City, Kansas, joint venture, and Columbus and Toledo, Ohio.

Barring any lawsuits by anti-gamers, and with the approval of regulators, Penn also will have racinos in Youngstown and Dayton, Ohio.

And these projects come with reasonable tax rates—33 percent for casinos and 33.5 percent for VLTs at racetracks. They also come with a certain amount of protection from future competition, as the state constitution would have to be amended to allow more casinos and the racetrack licenses have been given out.

And, in typical Penn fashion, they will not be balance sheet-busting palaces. The Ohio casinos will cost $700 million combined, and the racinos $150 million each.

• Pinnacle Entertainment. The movers for Pinnacle are margin improvements and its casino to open in Baton Rouge.

Pinnacle historically has operated at low EBITDA margins, and relatively new CEO Anthony Sanfilippo has made substantial progress at improving them. There is still room to go to match peers, and that’s all money to the bottom line.

Pinnacle also dodged a bullet when the Texas legislature once more went home without legalizing gambling.

That is especially important to its Lake Charles, Louisiana, casino L’Auberge, which draws from fast-growing Houston, Austin and San Antonio metros.

Further down the road, Pinnacle gets competition in Lake Charles when Dan Lee’s Creative Casinos opens Mojito Pointe adjacent to L’Auberge.

But Pinnacle and Lee are cooperating to make the combined resorts a destination tapping that huge East Texas population. That should also help withstand the challenge if Texas ever approves gaming.

Finally, Pinnacle has a wild card: Vietnam, where it has bought a 26 percent stake in the multibillion-dollar Ho Tram resort rising along the coast.

If Vietnam can develop even slightly as well as Macau and Singapore, the needle moves far to the right.

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