"I took a test in Existentialism. I left all the answers blank and got 100." Woody Allen
Though the common sense fallout of the Brexit vote should have little or no impact in the intermediate term on the overall health of gaming sector stocks there was, and could be more, collateral damage on the trade as the market continues its retreat this week and perhaps part of next. There will be a rally but why and when is anybody's guess now. The blabber we are hearing from gurus thus far amounts to very little beyond conventional wisdom.
So wither goes gaming shares in these general market headwinds?
Over the weekend, we've talked to our industry sources in the three core global gaming centers where share prices got a drubbing last Friday when the first news of the UK's exit from the EU broke. What follows is a consensus of that opinion blended with my own interpretation to try and present some clarity during the very cloudy passage ahead.
We recognize not all gaming shares will dip or recover at the same time at the same rate. This will present great entry points for some, sell signals for others, but for most, my view is sit tight and hold.
Here, by area, is the best of our view now:
1. Macau. As usual, this huge market presents a positive/negative factor mix. Our overall outlook here remains positive primarily because the core patron base of the area is virtually all domestic China. Even a Brexit induced recession in the UK or the spreading of it to the EU, won't have a huge impact on the stocks here. (Currency fluctuations could impair Galaxy somewhat because of its UK bank loans), but other than that, we believe the downside, if there is one, is the linkage between the China RMB, to the Hong Kong dollar, which in turn trades with the US dollar. That could affect GGR to some small degree.
If the US dollar continues to trend upward, it could have an echo effect on China gamblers. This according to our sources would be minimal but needs to be pointed out. Some of our colleagues say this currency rate could translate to a less than one percent in projected GGR and by it an equally small hit on EBITDA.
Another uncertainty is the possibility that China will decide to play scared poker, seeing its exports at risk due to a powerfully devalued British Pound and devalue their currency. There has been some hypocrisy here both by China and the EU. Leaders of Britain, France and Germany have all traveled to China over the past several years in an effort to beef up bi-lateral trade at the expense of general EU policies. They've been playing a double game. There's been lip service about EU unity but lots of salesmanship of home cooking.
This may have an ironic twist in effect, making Chinese goods cheaper in the huge EU market increasing exports, which Xi wants to keep steady. At the same time, the government remains focused on building domestic consumption and jobs. Clearly, gaming isn't on top of the agenda in such policies but a strengthened domestic economy will be a positive for Macau. There's no escaping that.
Last Friday, the Bank of China fixed the exchange rate .6375, which to our sources signals a cautious, steady as she goes approach. Also the Chinese may elect to tighten capital controls, which could also pose a negative to Macau, albeit a modest one.
Bottom line: The Macau market, just beginning to rise out of all the swamps of uncertainty evoked by government actions since last year didn't need any more shaking up, no matter how minimal that may be. We've continued to be bullish on most Macau shares, believing that as yoy GGR stabilized and new properties generated more visitation. (Wynn (NASDAQ: WYNN) has now set an August 22 date for its official grand opening.)
There is upside room in many shares in this space. But given the emotional tide inundating global markets with uncertainty this week, we think both the Dow and the S&P could face further downdrafts a while, before common sense returns. Some analysts we've talked to believe we could see the S&P moving south to its February lows around 1810 or so. With this kind of sentiment out there until the realization sets in that the world is hardly coming to an end, here's our take:
If you are in Macau shares now, hold. If you've bought in during the recent uptick in the group there is definitely a shot now to price average. With Wynn for example, due to its usual premium trading has taken the largest hit and at writing is down around $92. That's a buy opportunity depending on the math of your own holdings. Otherwise, just sit tight and wait, There could be more downside coming but hold, The September GGR for Wynn Palace could be the trigger for a smart, fast, upside recovery and move beyond as we have anticipated.
We see HOLD as the theme for Macau gaming stocks. However, if you belong to that caste of gloomsters who see the trigger on a global recession having been pulled, and are sitting on a fat profit now, you might want to consider taking chips off the table and jumping back in this fall.
2. The Las Vegas Strip
It's far too early to make a call on the Brexit vote being the catalyst for the US recession. Low job growth here, in the EU and globally in general is a definite downside risk for all. But the US economy has been propped up by the Fed and is likely to continue that trend more so due to the UK departure. We're neither sanguine nor overly worried about the prospect at the moment though we are concerned, as we've written before, that Las Vegas gaming win has still not gotten back to 2006 levels and grown beyond. Yet the non-gaming growth has been a strong positive and we believe it's been a contributor to the upward move of stocks like MGM (NYSE:MGM) over the past 90 days.
Our Vegas sources are uniformly inclined to believe, as of our conversations this weekend, that the Brexit vote will have little or no impact on strip revenues that can now be discerned. Bear in mind that international visitation to Vegas has two 600lb gorillas, neither of which faces severe impacts from the UK action: Mexico and Canada. Both countries contribute the biggest single shares of international visitation. Arrivals from EU nations, led by the UK are in the very low single digits as a percentage of the total visitation of 16% represented by international vacationers.
Forward bookings on conventions, meetings and special events across the board should remain stable. We see little or no material impact on Vegas heavy gaming shares as a result of the UK vote.
So our view here as well is: HOLD. Depending on your entry points on Vegas shares you might wish to jump on some short-term declines to back fill and price average down.
3. US Regionals
Here we believe there are buy opportunities as these companies, caught in the general Brexit downdraft have taken a hit but remain as immune as it is possible to be in this global financial dive. The group has traded up recently as a safe at home play for many investors. Gaming revenue has stabilized or resumed modest growth in many markets, non-gaming, reflecting the same consumer patterns as Las Vegas, is growing healthily and above all, the move toward unlocking shareholder value by spinoffs or REIT conversions, will strengthen.
Of the two major domestic REITs, we like MGM Growth Properties (NYSE:MGP) best because of its parent company control and financial ability to continue acquisitions. As we had forecast months ago, one of MGP's first targets would be to buy out the Boyd share of the Atlantic City Borgata. It's happened. This will be positive for earnings there. Caution: This fall New Jersey voters will decide whether to allow two new casinos to be built in the Meadowlands area across the Hudson from Manhattan.
This will be a negative for Atlantic City and possibly trigger more casino closings. However, we believe that Borgata has factored this into their plans arriving at the obvious conclusion that they will inherit a disproportionate share of residual revenue not poached by a Meadowlands development. MGM would not have bought out Boyd's half of the property without carefully calculating the possible revenue losses if the voters give north Jersey casinos the thumbs up.
Also MGM's National Harbor property, a terrific development, will open by the end of this year. And its not-so terrific, Springfield Mass property will find its way into the REIT. Either way shareholders will benefit. The hit MGM is now taking due to the general market dive makes an inviting entry point now.
(Note: MGM's Macau project is now scheduled to open by 2018, a time we believe, most of the negatives will have been wrung out of that market and new capacity will find a strong opening niche).
Conclusion: In what will become, short term at least, an all bets are off investing environment for most stocks, we think the gaming sector will more than hold its own. And in that sense, we guide investors to consider price averaging or holding fast. The sector as a whole has taken a mighty beating since the first Macau junket crackdown and has only recently began inching its way back up.
These stocks have not been toppy or wildly overpriced in our view relative to the long-term stability of their earnings power and rootedness in the international and domestic gaming/entertainment demand.
Author's Note: Howard Jay Klein is a c-level casino executive and consultant. He is the author of Mastering the Art of Casino Management. His opinions are not standard security analysis, though he does utilize some of the common metrics of that profession. His objective is to provide 360-degree coloration to the overall view of gaming stocks. His own gaming portfolio is held in a blind trust for his family so as to not present conflict of interest problems with his consulting clients past, present or future.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.