The last three months haven’t been the most enjoyable for casino operators that do business in the regional gaming sector.
Despite third quarter earnings reports that could be viewed as relatively positive and a healthy mergers and acquisitions market, shareholders have seen their investments crumble.
The stock prices of regional casino operators Penn National Gaming, Eldorado Resorts, Boyd Gaming Corp., and Caesars Entertainment closed Friday at or near their 52-week lows.
Macquarie Securities gaming analyst Chad Beynon said regional stock prices are down 24 percent in the last three months and 9 percent since quarterly earnings reporting ended more than 10 days ago.
“We want to take a step back and remind investors that the core fundamentals of these businesses remain healthy and, as other consumer industries may be facing tough comps, we think regional gaming will finish strong through year-end,” Beynon wrote in a research note.
Union Gaming Group analyst John DeCree said nearly every regional gaming company has experienced a stock sell-off after the shares hit high-water marks, which was driven by a “confluence of factors.”
DeCree said interest rate tightening by the feds and fears of a U.S. economic slowdown have played a role, and that some regional companies, especially those with Las Vegas holdings, were hurt by third quarter Las Vegas Strip concerns. He also cited a potential trickle-down effect from a drop-off in results in Macau.
“There is a lot of hedge fund concentration and volatility in the sector, and the momentum shifted to the downside fast and hard,” DeCree said.
The downward spiral came despite more $5 billion in regional gaming consolidation, which allows companies to increase cash flow and lower corporate costs through synergistic savings.
Penn completed its $2.8 billion purchase of 12 casinos operated by rival Pinnacle Entertainment in October and simultaneously announced two other “tuck-in” acquisitions, Margaritaville in Bossier City, Louisiana and the Greektown Casino-Hotel in Detroit, both of which will be finalized over the next few months. Both deals are in partnership with real estate investment trust VICI Properties.
Reno-based Eldorado Resorts was the other big buyer, purchasing an Illinois riverboat casino in August and then joining Gaming and Leisure Properties in acquiring seven casinos from Tropicana Entertainment for $1.8 billion in October.
Boyd Gaming acquired five casinos, including four Pinnacle properties as part of the Penn deal, while Caesars bought two Indiana racetrack casinos.
Transactions involving REITs, which own the land and lease the properties back to operators, are becoming more common. Several casino companies have said on recent earnings calls that they prefer to own their land and buildings but are not opposed to additional REIT transactions.
Meanwhile, boosting the stock prices is a universal theme. Several companies have seen insiders acquire shares in recent weeks as a vote of confidence.
DeCree, Beynon and Jefferies gaming analyst David Katz said the stock price declines have created buying prospects for investors, if they have patience. DeCree said its could take up to 12 months for the prices to recover.
Katz told investors last week that the “profound weakness” in gaming stocks has “created dislocation” but also presents investment opportunities. “Uncertainty” warrants strict review and caution, he said.
Added DeCree, “It seems hard to identify the catalyst that will change the trading momentum in the near-term. Once the dust settles a little, I think active money managers will come back to the sector and exploit the valuation dislocation.”
With the recent merger activity, however, came higher debt loads.
Of the companies followed by Beynon, each has elevated leverage, “which we believe is one of the reasons for the selloff.”
However, companies also have catalysts and 2019 growth paths that include deleveraging, he said.
Eldorado, for example, reported $3 billion in debt at the end of the third quarter. Company President Thomas Reeg told the Nevada Gaming Commission in September the long-term debt would increase to $3.8 billion after it closed the Tropicana acquisition.
Beynon said Eldorado is one company that will focus on deleveraging activities in 2019.
The hybrid of the regional operations group is Caesars, which has nine casinos or near the Strip, plus another 30 resorts in U.S. and Canada regional markets. The company, which shed $14 billion of debt through a lengthy bankruptcy reorganization that was completed in October 2017, is facing a management shake-up with the February departure of CEO Mark Frissora.
Credit Suisse gaming analyst Cameron McKnight told investors the company is a focus of merger activity, especially with its Friday closing price of $8.51 on the Nasdaq.
“We think interest in Caesars is high, and expect industry consolidation to continue,” McKnight said. “We think the board is very open to proposals, but we see large scale deals as complex and potentially lengthy.”
Howard Stutz is the executive editor of CDC Gaming. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
