FANTINI’S FINANCE: Ready or Not, Here it Comes

Earnings season has begun and we can’t wait for the filings and conference calls to hit full stride.

This might be one of the most enlightening earnings seasons of the post-Covid era as casino managers are starting to get hard evidence of the impact of tariffs and other Washington, D.C., melodrama on tourism and leisure spending.

Internationally, Macau is big news. Recent gaming revenues have exceeded forecasts and we should start to get a sense of how much of the increased business is falling to the bottom line.

In other words, are efforts to make Macau more than a gambling destination playing out to the benefit of operators as happened in Las Vegas during the mega-resort boom of the 1990s? Or are the demands of the national and Macanese governments for casinos to help fund economic diversification a drag on profits?

IT’S GOOD BEING KING

As usual, Monarch Casino has led off the season, and did so with blow-out earnings that spiked the stock price 20 percent.

The numbers were impressive: a 16 percent increase in EBITDA, 21 percent rise in earnings per share, no debt and cash piling up at a rate that could approach $400 million by 2027. That’s a hefty sum for a company with under 19 million diluted shares, of which about half is owned by members of the Farahi family. And the share count is shrinking as the extra cash goes into share repurchases, including 240,000 bought in the past quarter.

Add in management’s confidence that the still-maturing Monarch Casino in Black Hawk, Colorado, and renovations at Atlantis in Reno will continue to grow near-term earnings and you understand the bullishness.

The reasons for this success are simple. CEO John Farahi is an excellent operator, perhaps the best in the business. And that leads to the question of “What’s next?”

Analysts talk about M&A, but that isn’t necessarily easy. One of the things that makes Farahi so successful is his insistence on value. It’s hard to see him paying up as an acquirer for what many prospective sellers would ask or, conversely, selling his properties for a price others would be willing to pay.

Yet, something may happen. One issue is simply the passage of time and the family’s evolution. The company was built by John and brothers Bob and Ben. They all are in their 70s and thoughts of a transition to a new generation are natural. But does the next generation want to continue the company?

One solution might be the propco-opco route, though in the reverse of the normal way in which a company keeps its casino operations and sells its real estate. The Farahis are life-long real estate guys. They might want to go the opposite route, selling the operations and keeping the real estate.

Still, it’s a big country and Farahi might find the next Black Hawk-like property to buy and develop.

In the meantime, cash piles higher, dividends flow, shares shrink and profits climb. That’s not a bad situation for long-term investors.

A PERSONAL NOTE

Carlo Santarelli has left as Deutsche Bank’s lead gaming equity analyst for yet-to-be announced ventures.

Santarelli will be missed. In a world full of pressures on sell-side analysts to conform and to not stray meaningfully beyond management “guidance,” Carlo had the gumption to take independent stands.

That was most evident in his sobering analyses of online gaming companies. The pressure must have been especially challenging during the early years of legalized U.S. sports betting when DraftKings and a few other companies were losing money hand-over-fist but their stocks soared wildly. Santarelli saw through the hype and served Deutsche Bank’s clients well through his insight and his courage.

We look forward to seeing where Carlo goes from here. Meanwhile, good luck to Steven Pizzella, DB’s new lead gaming analyst.