2020 A PIVOTAL YEAR FOR AN INDUSTRY ON THE MOVE - Seeking Alpha
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GAMING INDUSTRY REPORT: 2020 A PIVOTAL YEAR FOR AN INDUSTRY ON THE MOVE Editor: Rena Sherbill Author: Howard Jay Klein Our mission in this report is to provide a broad based, forward industry 2020 outlook both for investors already holding positions in gaming stocks as well as those who have never invested in the sector. We cover our strategic breakdown of the sector at large, the golden metric by which to measure gaming stocks as well as a model portfolio of best-of-breed stocks. We also review how the trade war affects the Asian-centric part of the sector and decide that for our money, it’s wise to go long a historically profitable industry.
Alpha Gaming Thesis Unique dynamics; remarkable stability Short term volatility; long term profitability Casino Business History of gaming/gambling business 4 Sub-Segments of the industry Sector catalysts Industry risks Investing in Gaming Stocks EV/EBITDA: The golden metric for the sector 2020 model gaming portfolio: LVS, WYNN, CZR + ERI, BYD, PENN Stock catalysts and risks Gaming ETFs: There are better places to be Conclusion Call for 2020: Revenues will reach $75B. Threat of recession not concerning for present-day gaming sector. Consolidation of regional casino ownership will increase.
_ALPHA THESIS________________________________
Gaming is among the most volatile sectors short term, but long term has richly
rewarded savvy investors who understand both its peculiar dynamics and
remarkable stability. The gaming sector is complex and volatile short and
intermediate term because it is in many respects a heavily regulated creature of
government. Its revenues are published monthly by states and are available to
all. Short term, analysts tend to respond to even a monthly up or down tick in
revenue. But long term, the sector has proven to confer high rewards on
investors who understand that it’s a business deeply ingrained in the age old
human proclivity to gamble. It can take hits from events out of its control, but it
always rebounds. There is a wariness among some investors to dive into sectors
with high volatility (with good reason!) and gaming is definitely one of them,
however, we are expecting a strong 2020 across the board.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
_CASINO BUSINESS____________________________
The gaming industry is around 2,000 years old. Mosaics dating back to 23 BCE
even depict Romans shooting craps. The very word “casino” springs from 1638
when the Great Council of Venice finally authorized legal houses where
gambling was conducted for a profit. They were called ridotti, and later casini,
the Italian word meaning “small house”. Ever since, governments have had a
love/hate relationship with casinos - periodically legalizing and outlawing them.
People have long travelled far distances to access legal casinos. The Baden
Baden, Germany and Monte Carlo casinos in the mid 19th century were
magnets for tourism from all over Europe and beyond. At first casinos attracted
only the rich, but in time they also drew masses of ordinary tourists, a paradigm
that continues to the present day. Casinos have been opened and closed for
centuries in Europe and in the U.S., but when the Great Depression started,
Nevada mostly changed all that. In 1931, Assembly Bill 98 - which allowed for
wide-open gambling - was signed into law. This legislation is what allowed the
rise of the gaming industry and the regulated modern casino. Nevada’s casino
gaming didn’t really take off though until Bugsy Siegel opened the Flamingo on
December 26, 1946, which set the tone for what a Vegas hotel and casino is
today.
Then came the first cleansing of mob influences which continued unabated
through the 1970s when the last of the old mob interests were bought out or
purged. Nevada enjoyed a national monopoly on legal casinos until 1978 when -
promoted as a “tool of urban renewal” - New Jersey legalized casinos. That
busted Nevada’s monopoly and little by little casinos, both commercial and
tribal, proliferated first as riverboats and then as full fledged casino resorts.
Today, the worldwide gaming industry is a highly regulated one, generating over
$200b annual revenues according to a PWC 2015 study. Add in lotteries and
other forms of gaming and you have a global gambling business estimated to
reach $556bn by 2022. Whether it’s Venice in the Middle Ages or present day
U.S., it’s always been about the Benjamins. While they’re still called ‘sin stocks’,
the reality of capitalism trumps any moral perceptions of what constitutes sin
and the path to legalization is clearly expanding.
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The casino business is part of the consumer discretionary universe that has four
sub-segments of interest to equity investors:
1. Nevada: Las Vegas and Reno
2. U.S. Regionals: The 40 states that have either commercial or tribal
casinos. (Since tribal casinos are not publicly owned or traded, this
industry report covers only the commercial sector.)
3. Asia: Macau and the ASEAN nations will account for nearly 45% of all
global casino revenue within the next five years according to PWC’s
2015 Study. (This industry report will include two U.S. public companies
with dominant revenue flows from Asia, but not the Asian gaming market
per se.)
4. Legal sports betting is emerging and growing rapidly.
Casinos in one form or another are now legal in over 40 U.S. states. Arkansas
most recently became #41, authorizing four properties and a horse track. The
dominant destination of course is Las Vegas, which clocked 42 million visitors
last year. That is why we separate its outlook from the US regional review.
Visitation to regional casinos is also difficult to quantify since the overwhelming
majority of visits are from local residents - those customers within driving
distance with a high percentage of repeat, rather than unique, visitation patterns
over the year.
Gaming demand is alive and well, but how people game is changing with the
demographic surge of millennials. Like other forms of entertainment, it is the
vehicle of delivery that is changing the face of gaming. And that is what will drive
the state of the industry in 2020 and beyond. We’ve recently seen broadcast TV,
then cable, and now streaming services diminish the growth of theatrical movie
attendance from its heydays, but these shifts have not entirely killed any
industry. There’s more entertainment to watch than ever before, and it’s being
delivered consumers in new forms.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
Online Gaming Revenue Base Case $9B by 2020 Similarly, online casinos will continue to thrive but the brick and mortar casinos will nonetheless continue along a path of sustainable growth. That’s why there is currently between $6 and $10 billion worth of investments in brick and mortar casinos already committed by major public companies throughout the U.S. Add another $20 billion in Asia ongoing to 2025 and you have clear evidence that online gaming will add to, not kill, the brick and mortar casino space. Casinos today are integrated resorts appealing to mass destination tourism as well as international VIP players. The U.S. Bureau of Labor Statistics projects that the average American spends around $3,000 annually on all forms of leisure and entertainment. This includes in-home services like TV, cable, streaming, recorded music, video games, as well as attendance outside the home at theaters, movies, concerts, and sporting events. This figure represents around 5.6% of the total annual spend of consumers. Separately, The U.S. Travel Association reported that in 2018, leisure travelers spent $762 billion in all U.S. destinations, taking 2.1 billion individual trips. Casinos are the single biggest revenue generator in the space after the broad “vacations” category of spend. Non-gaming revenue generated by the nation’s 1,000 casinos also migrates into the numbers for concerts, hotels, shopping malls and sports betting that is hard to separate. Estimated 2018 U.S. casino revenue according to an American Gaming Association 2018 report reached $73.1 billion from 979 commercial and tribal casinos covering 40 states. Of that, $41.7 billion was generated by 465 commercial casinos in 24 states. Historically there are dozens of factors which intersect and produce impacts on the trading patterns of gaming stocks every year. There are macroeconomic trends, local shifts in regulatory policies, cannibalization of existing markets, mergers and REIT sales. There are rapid technological advances in gaming equipment as well as changing visitor demographics. Yet, the average Vegas visitor is a 45 year old female who plays slots, a fairly consistent demographic that’s lasted over 10 years. Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
Below we look at the catalysts and risks of the four sub-segments in general and then further down in the Gaming Stocks section, we select our top picks to comprise a model gaming portfolio for 2020. The chart below shows how the mix between gaming and non-gaming revenue occurred during the period from 1990 to 2018, with 2019 forecasted to produce a 2%-3% gain and 2020 expected to meet that number again. From 2012 to 2018, Vegas’ Strip revenues recovered from the economic recession. By 2018, Nevada’s state-wide gaming came in at $11.9 billion, nearly hitting the $12 billion achieved in 2007 before the full force of the recession hit the market. It was a 3% y/y increase. The Las Vegas Strip properties produced $6.6 billion of the total. The strip benefitted last year from a strong U.S. economy and an increase in non-gaming amenities. We are setting an overall 2020 forecast of $12.2 billion in Nevada gross gaming revenue (GGR) statewide of which $7.1 billion will come from the Las Vegas strip. (Our projections are based on our assessment of numbers from UNLV gaming stats.) As we mentioned above, Las Vegas clocked around 42 million total visitors last year; its hotels also posted the highest average occupancy rate of any destination in the U.S. at 88.2% of the 152,000 available rooms. Using 2018 as our base, we are projecting visitation to rise to 43 million for 2020. As noted in the below chart, gambling participation of Vegas visitors is now on the upswing from 2016 lows. Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
Las Vegas 2020 Catalysts:
● No new major* room supply - as noted above. (*A downtown Vegas
boutique hotel, The Circa, could be opened by December 2020 with only
777 rooms.)
● Strong forward convention bookings and several big new shows
expected.
● Debut of the Las Vegas Raiders NFL teams in Q3. This is expected to be
heavily marketed by tying visiting team fans to Vegas game weekends.
● Room upgrades in properties and amenities across the board will
command increases in REVPAR.
Las Vegas 2020 Risks:
● Macro concerns about recession.
● Investors see discretionary income spending taking a nose dive in the
case of a deep recession.
Vegas Conclusion: The Conference Board is now forecasting U.S. GDP growth
to slow to around 2% for 2020. 2020 will see no new major increases in Vegas
room capacity or the debut of new hotels. Both the Asian themed Resorts World
project as well as The Drew Resort project are not expected to come on line
until 2021. Given a stable capacity base even with a slowing GDP ahead, we see
Nevada in general and the Strip in particular, holding its ground against anything
but a major recession.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
The trend to consolidation in this sub sector has been moving at an ever more frenetic pace since 2015. At the heart of this development is the palpable reality that casinos cannot be built just anywhere. The regional industry got seeded and grew wherever state legislatures planted them or wherever federal law allowed tribal gaming. Thus, all regional casinos tend to cluster in those states where state governments have sanctioned their existence. That is why their locations do not necessarily follow the business model of always going where the most fish are swimming as is the case for example with theme parks or professional sports arenas. So we find states like Louisiana, Mississippi, and Missouri dotted with clustered casinos. This sometimes winds up producing oversupply relative to population - gamers and gamblers can only go where the state law allows them to go. Regional casinos are not dependent on local populations per se but on feeder markets within reasonable driving distance over state borders. This produces database duplication as well as a high cost of marketing. An internal study of casino patron databases we conducted for a regional chain revealed that the average patron held loyalty cards from anywhere between 3 to 4 different casinos. In a merger, such duplication of offers would be eliminated. With consolidation, operators could also reduce redundancies at the corporate level, consolidate data marketing, compress and sell off marginal properties to help finance acquisitions. This is evidenced by the ongoing case of the El Dorado-Caesars merger where management has targeted $500 million in staff and marketing reductions to meet forward financial targets. This was also the Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
case when El Dorado bought Isle of Capri casinos in 2017 and reduced
duplicative management positions and marketing programs. Much of the
savings are coming from elimination of excessive management oversight. The
result: Better geographic balance, higher utilization of loyalty card memberships
and lower marketing costs. This has triggered the move by companies to
consolidate and merge.
Blackstone (BX) recently bought the realty of MGM’s Bellagio for $4.25 billion
which will have the knock on effect of raising valuations of all major Vegas
properties. Penn National and Caesars have followed suit in REIT spin offs. Such
spin offs accomplish three aims: they monetize the realty value of their casinos;
they unlock value for shareholders and they establish a reliable cost basis for
rent to be stabilized over long leases. That in turn has contributed to improving
margins.
U.S. Regionals 2020 Catalysts:
● Consolidation of regional casino ownership will continue and speed up.
● Companies are poised to either merge, spin off realty or acquire
competitors that are still trading cheap relative to their prospects in 2020.
● These trends increase value for companies and the broader sector.
U.S. Regionals 2020 Risks:
● Concerns about cannibalization.
● Increases in competitive properties in states like Massachusetts and
Maryland.
Regionals Conclusion: We think the trend to consolidate and merge will be
strengthened even further in 2020 with two factors already in place. One, an
increased number of mergers and two, the sell-off of realty to REITs to raise
cash and unearth shareholder value. Casinos are unique realty in that they are
licensed premises limited in number and location by state law. Cannibalization is
a threat as always, but as Atlantic City has proven, gaming markets can shrink
from competition but they don’t disappear. This forms the basis of realty value
for spin offs into REITs as well as supporting higher valuations for all.
As you can see below, Macau has stabilized from recent headwinds (namely, the
China/U.S. trade war, a weakened yuan and violent Hong Kong protests) and
slowly but surely is recovering in mass tourism and VIP tourism. The trend of
gross gaming revenue through the end of 2018 generated $37.7 billion. 2019
YTD is tracking at 2% ahead of the 2018 total. 2020 has been forecast in the
range of a 3% overall rise over 2019 by a consensus of analysts.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribersA note on coronavirus: Of course, these numbers have not taken into account
the coronavirus (CV). The number of Macau arrivals reflect the scare, having
fallen 80% from anticipated numbers laid out before the outbreak. We believe
the key stocks in this sector will continue to take a beating until the pattern of
the virus becomes clearer. Our representative stocks have all taken major hits. A
case could be made that they are cheap relative to pre CV levels though there is
no metric to forecast the trading patterns of gaming stocks until we have a
better grasp of the duration and degree of CV contagion properties face going
forward.
Asia 2020 Catalysts:
● 3 integrated casino resort licenses to be issued by Japan sometime in
2020.
● Macau stabilizing + GGR expected to increase
● China/Macau light rail launch
Asia 2020 Risks:
● China related trade and regulatory fears.
● Hong Kong protests continue or get worse.
● Coronavirus uncertainties
Asia Conclusion: There have been a number of headwinds in the Asian gaming
space over the last few years, but for the most part they seem to be subsiding
and any negative after-effects seem to be offset by the expected catalysts for
growth. Political quagmires aside, growth seems to be on the upswing in this
sector. We see a steady recovery in Asia, particularly Macau. We think VIP
segment decline will be staunched and turn from a +2% to a +3% rise and mass
tourism will rise between 7% and 9% y/y. The CV scare of course throws
uncertainty into any viable forecast, especially regarding just how effective the
light rail system will eventually become in transporting masses to Macau from
provinces beyond Guangdong.
Some may be inclined to see a buying opportunity if price averaging figures into
their strategy valuations. The CV “discount” could reach ~10% off pre scare
highs. We do not advise selling. The decline we see clearly reflects two
rationales: investors who wish to take profits off the table after the sector’s
recent upside run and those concerned that the CV related declines have
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscriberssignificant momentum ahead due to the uncertainties of forecasting the duration of the virus and the degree of damage it could ultimately inflict on the Macau visitation through H2 and H3. We take the view that whether in H2 or 3, the inevitable result is that the sector will recover. We believe the underlying fundamentals of the Macau gaming market continue to be very bullish going forward. Black swans damage without question, but sooner or later they all swim away. In May of 2018, the U.S. Supreme Court struck down a law that in effect prohibited the legalization of sports betting outside the grandfathered state of Nevada. Since then, a gold rush mentality has inundated the sector with a mad dash by states to legalize. As of this writing, sports betting is now legal in 13 states with as many as 20 coming on line within the next three years or less. It is very early stages in the development but patterns are already beginning to emerge that spark investor interest. There is growing inquisitiveness about online and brick and mortar sports betting operators as pure plays. Casino operators in states where legislatures have green lit sports betting expect bumps in footfall. Technology companies that supply the complex software tools that comprise the heart and soul of processing sports bets are also garnering investor interest. Our outlook here is that sports betting revenue will reach $1.3 billion in 2020 spread throughout the 13 states that are now legal. Morgan Stanley forecast that legal sports betting will reach $15 billion in annual revenue by 2025, at least 79% of which will be churned out by online/mobile apps sited in brick and mortar casinos and arenas. And 21% will come from brick and mortar books. The MS study projected revenues using New Jersey actuals in hold percentage and volume as a standard arriving at a plus minus number depending on the demographics and per capita income of the states it expected to legalize through the 36 it believes will ultimately green light sports betting. The American Gaming Association’s 2018 study estimated that illegal sports betting in the US generates around $150 billion annually. Legal wagering will never totally replace the illegal market and off-shore bookmaking due to such factors as credit issuance. Sports betting books will proliferate at casinos throughout the U.S. as legalization spreads. Right now sports betting deals are mushrooming between casino operators, online platforms, sports leagues and tech companies. The result is a highly balkanized, difficult to pinpoint investment landscape for 2020. Sports betting is a low hold revenue generator, averaging anywhere between 6% to 8% against total betting handle, significantly lower than any other game in a casino environment. This means that over time with such factors as odds, volumes bet, various levels of player skill, that the operator will “hold” or retain between 6% and 8% of the Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
total amount bet. Thus, if a total of $50,000 is wagered on an NFL game, the
“house” or operator can be expected to “win” or retain at 6%, or $3,000 before
expenses. As a contrast, casinos generally “hold” over 17.5% of the total
wagered on slot machines. So the same $50,000 bet on slots would yield over
$7,500.
Overall, when you factor in the relatively low “hold” pre-expenses, operators
have to see a broader, ancillary value for sports betting as a contributor to EPS.
And that contribution comes from the significant increase in foot traffic sports
betting will produce, especially during major seasonal sporting events. In
between there is a steady flow of attendance at sports books for crucial games.
This translates to increased revenue flows from rooms, food and beverage,
entertainment as well as cross action on the casino floors from customers who
like to play slots or blackjack before and after game telecasts go live.
Sports Betting Catalysts:
● 20 more states going legal within the next 3 years or less.
● Casinos in states with legal betting expect bumps in traffic.
● Interest in pure play sports betting stocks is increasing.
Sports Betting Risks:
● While early indications are highly positive, the built-in low hold
percentages of sports betting action spook some investors.
● It continues to be difficult to value the pure plays so early in the game.
● The many partnerships that have evolved makes it difficult for investors
to isolate the accretive value to EPS of increased foot traffic to casinos
as a result of sports betting.
● There is also concern as to just how much extra revenue will emerge
bottom line.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribersPure Play Sports Betting/Online Casinos Market Cap The Stars Group (TSG) 6.96 billion William Hill PLC (WIMHF) 1.95 billion Sports Betting Conclusion: Sports betting is now legal in 13 states and will ignite increases in table game revenue, hotel visitation, food and beverage sales as wagering on big events takes hold and produces new customers for casinos. It’s still early days to make a call on pure plays though some of the stocks, like The Stars Group (TSG) for example, seem poised for a good value buy. This has to do with management’s focus on scaling up quickly in the online space and the fact that it’s diversified from its overdependence on poker to emphasize casino and sports betting as a key part of its future. Time will tell though before we make an official bullish call and we’ll wait a bit longer in this part of the space. Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
_INVESTING IN GAMING STOCKS________________
All the stocks in the model portfolio below meet our criteria for strong
management, commitment to cost controls, opportunistic moves in expansion,
solid underpinnings of basic revenue flows, high quality product and powerful
post-headwinds earnings profiles. Specifically with this sector, however, we
have focused primarily on two key metrics:
1. All-time highs within the last 10 years or more to impart a sense of investor
sentiment when tailwinds are strongest.
2. What we continue to believe is the single gold standard of measurement of
gaming sector stocks: EV/EBITDA.
More than many sectors, casinos are voracious eaters of capex whether used to
expand existing capacity, acquire competitors or build brick and mortar
properties in new markets. So the way in which capex debt is absorbed and
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribersultimately transformed into accretive EBITDA is a very telling marker of both management’s asset allocation skills as well as management’s savviness relative to peers. And since we see a powerful trend in casino operators spinning off their realty to REITs and/or institutional buyers, EV/EBITDA becomes a vital metric. In brief, it tells us what a property may be worth to a corporate buyer. And if that number is strong for a big buyer, the same metric would apply to an investor buying its stock. In the end, the enterprise value of the business is a clear guideline as to what a business is worth to a buyer relative to its peers. The S&P 500 EV/EBITDA has averaged between 11 to 14 over the past five years. Earnings are crucial of course, but gaming operators’ EPS numbers are subject to wild cards such as the hold percentage over a given quarter that other type companies are not. They also can be subject to the vagaries of weather, regulatory whim and rising construction costs. So over time, a healthy EV/EBITDA ratio says much about how effective management has been and how well it has converted ROIC into the standalone value for a potential buyer. A healthy ratio eventually benefits investors because in theory potential buyers of the business will be paying a higher premium. An EV/EBITDA ratio that’s considered healthy is around 10. Given the industry’s high capex and average long term debt carry, “healthy” can take on a more generous interpretation. Because of the inherent volatility of the sector we are currently flat lined on valuations. That presents an opportunity for investors in the stocks that make up our model portfolio for 2020. In the gaming sector you have a consumer discretionary business going through changes as technology and ever expanding consumer demand for live and online entertainment increases. Gaming endures because it has proven a very solid, long established need for diversion in human nature. And at the moment, due to various headwinds, the sector is running flat, rife with great stocks at cheap prices. Our baseline criteria for selecting our model portfolio below are those stocks that are the highest conviction buys based on their current valuations and prospects going forward for 2020. We have not included the Asia based giants which combine well over $20 billion in annual revenue but trade on the Hong Kong stock exchange and therefore are not as closely followed as U.S. stocks. The exception is Melco Resorts & Entertainment Ltd (MLCO) which trades on NASDAQ, but does not have U.S. based properties. Genting Berhad, a Malaysia based gaming giant traded in that country does have a big U.S. footprint in New York and another coming in 2020 in Las Vegas, but it is not traded on U.S. exchanges. We have also not included gaming REITs as they are fundamentally real estate plays. Readers may ask why we didn’t include a big name like MGM Resorts International Inc. in our model portfolio. It does have a great asset base in Las Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers
Vegas currently being spun off into REITs and realty operators to reduce debt
and increase shareholder value. It boasts a strong focus on the millennial
market, sports betting and a strategy of operating casino resorts, not owning its
realty. Regional properties are a mixed bag of winners and losers, hence the
mission to rid itself of as much of its real estate values as possible and
concentrate on making money as operators. We’re neutral on it though and
haven’t included in the portfolio below as management ponders further sales of
properties to REITs or institutional realty investors.
We also wanted to balance the model portfolio between Las Vegas, U.S.
Regionals and Asia-centric Vegas giants. We have weighted the model portfolio
to one third for each sub sector to provide balance against headwinds and
maximize upsides for tailwinds. For example, when Asia heavy stocks such as
Wynn are hit by China trade woes, U.S. regionals are barely affected. Yet an
investor in this model portfolio will have a solid stake in a Macau rebound in
2020. Likewise, when transactions in the U.S. regionals heat up, investors in that
sub sector will benefit.
In summary, this portfolio is built to minimize downside risk, maximize tailwinds
and provide a baseline investment in companies with sound track records,
strong management, and bright prospects ahead. Our primary objective is to
present a portfolio recommendation that is balanced to produce maximum
returns (Target appreciation goal: 25% return by end of 2020) from the three
prime sub sectors:
● Heavy Las Vegas
● Las Vegas/Asia
● U.S. Regionals with a sports betting catalyst
Asia-Centric/Vegas
Las Vegas Sands, Inc. (LVS)
Price at writing: $65.31
All-time high: $138.25 reached 10/12/2007
EV/EBITDA: 10.58. This ratio reflects a very healthy balance sheet and easily
managed debt profile.
Our Price Target: $75-$80 by 2Q20 based on what we see as a diminishing
of China headwinds.
The market valued LVS at the apogee of the Macau bonanza, prior to the world
recession, but more critically, before the infamous 2015 series of blows inflicted
by China regulatory crackdowns. Since then, Macau has moved rapidly toward
mass market vs. VIP growth and LVS properties have benefitted
disproportionately with its dominant control of rooms.
LVS Catalysts:
● Macau recovery: We see around a 6% to 8% increase in mass visitation
to Macau benefitting LVS properties.
● The company is converting its Central Cotai properties to The Londoner
theme to upgrade its grip on premium mass play. It’s due for completion
of Phase One before the end of 2020.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers● Japan: A consensus of observers we consulted in Japan as well as those
who follow LVS agree that the company is to be considered “the favorite
bidder” for the grand prize of Japan’s Integrated Resort development in
the Tokyo/Yokohama market. That deal could cost up to $10 billion with
an ROIC we calculate at 20% accretive to the parent company.
● LVS Singapore is investing $3.3 billion in diverse new capacity and
amenities as part of a deal with the government to preserve its duopoly
in the market through 2030.
● LVS has partnered with Madison Square Garden Corporation (MSG) to
build The Sphere in Las Vegas, a massive 18,000 seat globular orb
adjacent to its Venetian property.
● Debut of the light rail system connecting Macau to the entire China rail
network brings in more traffic.
● The pricing, the dip and increased dividend at its current price should be
enough to avoid a panic reaction to coronavirus fears.
LVS Risks:
● The Asia centric gaming stocks must always have one eye peeled on the
political winds out of Beijing. Negative crackdowns are what caused the
2015 decline - not any sudden decision by masses of consumers to stop
gambling.
● Concession renewal - Macau casinos face licence expiry - beginning in
2020 is a risk, but in our view a small one. China has never been in the
business of killing golden geese. It’s a risk to be aware of, but not
enough in our view to avoid of the sector.
● The devastation and fear wrought by Coronavirus - and its aftereffects -
is something noone can truly quantify or predict.
Wynn Resorts Ltd (WYNN)
Price at writing: $126.16
All-time high: $228.35 reached 2/21/14.
EV/EBITDA: 13.99. This reflects trailing capex both for Encore Boston as well as
ongoing Macau projects.
Our Price Target: $150 to $180 post 2Q20.
WYNN’s high was reached prior to the full force of the China junket crackdown
bludgeoning Wynn’s VIP segment as well as a series of other challenges,
including the misconduct allegations and subsequent departure of the
company’s founder Steve Wynn. However, the company has survived both
external and internal blows and is now poised for an upside founded on
expansion in Macau, the rebound of the VIP market assuming a China trade deal
and its development in Encore West on the Vegas strip. Long term, we think
superior product here will win the day for Wynn in Las Vegas, Boston and
Macau. Its command of the basic high end customer base linked to aspirational
tourism makes it a must for any gaming portfolio.
WYNN Catalysts:
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers● Encore Boston has debuted tracking strong numbers except for slots.
Impact of stepped up marketing in that segment is expected to help
produce the projected $250m to $300m in EBITDA for the property by
year two.
● Development of an entertainment/convention expansion across from
Encore.
● Upgrading of Wynn Macau property to address the premium mass
market.
● Debut of the Macau light rail system by the end of 2020 as noted above
for LVS.
● Asian giant Galaxy Entertainment Group continues to hold 5% of Wynn
shares. Possible partnership ahead aimed at a Japan license.
● Its corporate culture has been transformed by Wynn’s departure to better
reflect ESG realities.
WYNN Risks:
● The aforementioned China woes hit this company’s VIP business due to
its 70% dependence on Macau.
● Its leadership in a currently declining VIP segment could continue longer
than we believe.
● While culture has improved, there is no true successor who approaches
the founder’s commercial insight and ingenuity.
● As mentioned above, the devastation and fear wrought by Coronavirus -
and its aftereffects - is something noone can truly quantify or predict.
Las Vegas/Regional
We have included both partners in the expected merger between Caesars
Entertainment and El Dorado Resorts Inc. as the entity that will emerge from
both as Caesars Entertainment when the deal closes sometime in early 2020. It
will command 60 properties in 16 states and will emerge as the largest casino
operator in the U.S. by far.
Caesars Entertainment (CZR)
Price at writing: $13.67
All-time high post private equity disaster price: $17.75 on 4/4/14.
EV/EBITDA: 16.17. On the high side largely due to debt profile post private
equity deal of 2008.
Estimated average price of Carl Icahn buy of up to 20%: $9.12.
CZR Catalysts:
● Icahn expected to hang on and monitor expected $500 million in cost
savings promised as well as supporting CEO Tom Reeg in property sell
down decisions to reduce $17.3 billion debt incurred as part of merger.
● CZR expected to exit Asia and possibly the UK and Egypt to put full
focus on building off its massive 55 million member U.S. Total Rewards
program. Probable sale of South Korean project costing $775 million for
around that number earmarked for debt reduction.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers● New top management headed by highly effective CEO Tom Reeg will
deliver earnings increases and better valuations as he has already done
for ERI.
El Dorado Resorts Inc. (ERI)
Price at writing: $59.78
All-time/Latest high: $58.53 hit 12/20/2019.
EV/EBITDA: 10.15
Despite being near its all time high we continue to believe that ERI represents a
solid buy as its properties are well located and because of management’s strong
focus on consumers. Pre merger this is solid evidence in our view of a tightly
managed, smart asset allocation strategy that has built this Reno-based regional
into a national giant. In a post of ours on 9/20/16 we noted that the stock was
selling at $14.25. “It’s a strong buy, actually cheap” we told readers. We now
apply our high conviction to 2020 and beyond as the merger reveals price
discovery we believe will be positive.
ERI Catalysts:
● Set apart from the merger, ERI has 26 properties in 12 states distributed
over all key regions.
● ERI has made one of the best deals with a sports betting partners in the
entire sector. It assigned its brick and mortar sports book development
and operation to William Hil PLC (WIMHY), the UK betting giant. In
addition to operations and profit sharing, ERI is to receive equity first in
the US subsidiary of Hill and later, as justified, in the huge UK parent.
● Its online sports betting business will be assigned to The Stars Group
(TSG). TSG will run ERI’s (and subsequently the new company
post-merger) online sports betting operation as a partner.
● This gives the company the broadest access to both brick and mortar
and online bettors of any regional competitor.
● Having two sports betting partners makes great sense with one hard
focused on live sport book operations, and a second entirely in
command of mobile betting.
ERI + CZR Risks:
● Both CZR and ERI will be subject to the market’s ultimate take on the
merger in the early part of 2020.
● The company has incurred $17.3 billion in debt to do the deal and the
speed at which it can reduce it will be a big factor in the stock action.
● Carl Icahn is a joker in the deck. Whether he hangs in or suddenly leaves
will have a strong impact on the trading of the shares that could limit the
upside.
U.S. Dominant Regionals
Readers should note that all major U.S. regionals have spun off all or parts of
their realty to REITs as part of a strategy to unlock shareholder value. Our calls
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscriberson these stocks for our model portfolio are based on operations and forward
earnings prospects for a 2020 perspective and beyond.
Boyd Gaming Corporation (BYD)
Price at writing: $29.85
All time high: $55/65 reached on 4/8/05.
EV/EBITDA: 11.29 This good ratio reflects - as does ERI - smart asset
allocations.
Our Price Target: $45 by 2Q20
BYD Catalysts:
● BYD has shifted focus by building a greater presence in the Las Vegas
locals market, selling off its 50% piece of the Borgata Atlantic City to
MGM Resorts (MGM).
● Boyd has made a strong deal with Fan Duel to assume operations
wherever sports betting goes legal.
● Boyd has what we believe is a good geographic 10 property footprint in
the economically robust and growing Las Vegas metro market.
● Management has an operating history going back to the 1970s and has
faced many recessions and understood how to manage through them.
BYD Risks:
● BYD is asset heavy in the Las Vegas locals market with 10 properties
there. It is a vote of confidence by management in the belief in the
continuing growth and vibrancy of the southern Nevada economy. The
growth has been strong to date, but investors need to be aware that
during the last recession, the local market took a hit just as the Strip did.
● Between 2008 and 2010, the market declined a cumulated 19% in
gaming wins.
Penn National Gaming, Inc. (PENN)
Price at writing: $29.83
Most recent all time high: $33.83 reached on 6/1/18.
EV/EBITDA: 11.14—This reflects a good balance between its appetite for growth
and its deft management of debt.
Our Price Target: $34 by 2Q20 largely due to good management fighting off
cannibalization, new leadership and a diverse footprint.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribersPENN Catalysts:
● 38 locations in 18 states places Penn among those companies with
strong diverse geographic footprints in gaming markets with stable
consumer profiles.
● Penn has done a sports betting deal with EU’s Kambi. It has properties in
8 states where sports betting is legal. The expectation is that this will
increase to 12 states within two years.
● Penn has two properties under competitive challenge. The Plainridge slot
parlor near Boston is now competing with the new Encore integrated
resort. And in Maryland, Penn’s West Virginia property is being hit by
MGM’s National Harbor resort in Maryland. Yet in both places its
ongoing investment is relatively low and it has already absorbed the
hardest hits. Going forward we see more stability.
PENN Risks:
● Penn confronts cannibalization in the two areas noted above, both from
formidable competitors.
● Elsewhere their portfolio is solidly rooted and market shares remain
buoyant. Combined with the relatively low sunk cost of both challenged
properties and the strong focus on budge slot play, there is this
mitigating factor: The budget slot player is always susceptible to
aggressive promotional marketing deals. While that can reduce margins
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribersfor certain, it still can remain profitable and keep such threatened
properties profitable. It’s the nature of the business.
ETF Name Symbol Assets (Aum) Market Cap
VanEck Vectors Gaming ETF BJK $26.15M 0.66%
VanEck Vectors Video Gaming and
eSports ETF ESPO $43.88M 0.55%
Roundhill BITKRAFT Esports & Digital
Entertainment ETF NERD $10.26M 0.25%
Defiance Next Gen Video Gaming ETF VIDG $3.71M 0.30%
There are four key ETFs in the gaming space. Of them, we think that Van Eck
Vectors Gaming ETF (BJK) is the pure play while others have significant holdings
in publishers of video games rather than casinos. Its portfolio is global and well
diversified with stocks like Las Vegas Sands, Sands China, MGM, Flutter (a UK
sports betting giant), VICI Properties and GLPI Inc REITs and Wynn Resorts.
This group represents over 54% of the portfolio and in our view is the only one
casino focused to the extent that its performance is tied to the sector more than
others.
Our own view of gaming ETFs are that while the good ones like Van Eck offer
balance, we prefer an investment style linked to the individual performance of
each stock. For example, a headwind out of China will hit Asia centric casino
stocks hard, but leave U.S. and Las Vegas heavy stocks either untouched, or
actually bump them up. We also think it important to keep a hard focus on the
quality of management among all players in the space and so are not only
focused on pure numbers alone. In short, we think there are better places to put
your money than in these ETFs.
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribers_CONCLUSION________________________________ __
Goldman Sachs said it believes the aftermath of coronavirus won’t spread
beyond 2H and possibly before. We think the recovery will come sooner and all
of the damage will be contained in 1H20 results, possibly spilling over to early
H2. We expect to see sharp declines in CNY comps y/y due to the CV scare.
But investors who may see reasons to sell down or totally close their positions in
Macau stocks need to bear in mind the longer view.
Based on our estimate of 5% overall growth of the casino sector, revenues will
reach $75 billion in 2020 of which $43 billion will be generated by commercial
casinos. This bodes well for growing valuations of the key gaming stocks in our
model portfolio for 2020.
According to a report issued in late 2019 by Beacon Economics, the prospects
of a recession are low over the next 24 months. GDP is growing steady, but not
overheating. Interest rates remain low, debt is constrained and the housing
market is slowly rebounding. Job growth is steady to strong. “This is not the
economy of 2006”, the report said. While other economic forecasters seem
more bearish, we think the gaming sector will prove resilient against the deep
dive experienced in the 2007-2009 recession. “It’s a different industry today,”
said a c-suite executive from a major operator in Las Vegas. “There’s no
overheated home equity loans that in the early 2000s contributed heavily to
gaming spend. Properties are more diverse, many dated ones have been
upgraded. Lots of property debt has been transformed into REIT debt, unlocking
realty values. City-wide room capacity is stable for 2020.”
Why the gaming sector in 2020? By any measure, the herds of true unicorns we
see gamboling in their familiar forests are thinning out. The early stage stocks of
tech, health care, e-commerce, and last mile sectors so coveted by investors
have gotten expensive. We are living in an investment world where everybody
knows everything at the same time. We believe investors who recognize sectors
with longstanding durability in public favor are well advised to take a good hard
look at gaming in 2020.
The reason: It’s a 2,000 year old business that isn’t going away anytime soon.
Despite growing online gambling options in many countries, the allure of a visit
to a casino town as a getaway has not dulled in decades, let alone centuries.
Online casino gaming will grow but it will never disrupt casino visitation to the
extent that it will render brick and mortar properties obsolete.
Buoyed by a stable economy, good job numbers and low interest rates, the
casino industry will benefit across the board, free of major macro headwinds.
We see the gaming sector headed north for 2020 as a result of three factors.
One, the easing of headwinds both domestic and Asian that has suppressed
Gaming Industry Report 2020: Exclusive to Seeking Alpha Premium & Pro subscribersvaluations of quality companies. Two, the growing confidence that the U.S. economy will at worst weather a mild recession in 2020 or slip by without one. And three, the strong trend toward the consolidation of the U.S. gaming market into fewer and fewer companies with growing sports betting revenue catalysts. We see on the horizon a continued pattern of movement for smaller entities to either merge, acquire or spin off realty. The companies we have selected for our model gaming portfolio in our view offer the best risk/yield prospects and balance of safety for investors in 2020.
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