"It's not that I'm so smart, its just that I stay with a problem longer…"
SA readers who have been following my articles know I have been unabashedly bullish on the sector for over a year and a half despite a lot of pooh poohing by bears and shorts who have been crying wolf along the way. There have been undeniable headwinds for certain. There have also been catalysts I maintained would eventually pay out. Many of the non-believers who commented on my consistently bullish outlook have either left tons of money on the table or took haircuts on options strategies, playing for a downside whenever the slightest blip of negative news rattled the sector. That's all fine with me.
My only point here is to reiterate the Sage of Omaha's most potent advice, "If you aren't willing to hold a stock for ten years, don't even think about owning it for ten minutes." This doesn't mean you must hold it for ten years to get great returns, but you have to think positively enough to tell yourself,, if I had to own this stock for ten years, I'd be comfortable with my decision. You believe the company is a proven quality producer of earnings and a growing valuation. Neither Buffett nor any other investor with a superb track record is always right. He's a self-confessed toe-stubber like the rest of us normal people, but clearly, less so.
To each his own. I never pretended to preach unassailable gospel. And anyone who does, no matter the sector, is proselytizing in the Church of the Bubble. My premise was simple: My 30 years in the casino business has had its lessons, many of which were acquired at no small cost, others which provide what I believe to be valuable insights that could contribute to a broader, 180-degree view of the valuations of the stocks I cover.
Overall I think investors who have been helped by my beyond the charts calls have done pretty well:
Since my early calls on these four companies, here's what has happened over the trailing 12 months:
Wynn Resorts Ltd (NASDAQ:WYNN): Up 78.30% plus dividends.
Las Vegas Sands (NYSE:LVS): Up 30.97% plus dividends.
Melco Crown (NASDAQ:MCLO) Up 27.53%
MGM Resorts International (NYSE:MGM) up 40% plus a first time 11-cent dividend paid last quarter.
So what next?
With these kind of returns the obvious question becomes a take on what I think we can expect going forward. Is this gaming upside running out of gas or is there plenty of fuel left in the upside tank?
I've studied the three prime sub-sectors this month using my own metrics mostly based on real-world performance of the companies. I took a look at casino win to average bet numbers, total win per gaming position per key feeder market, ratio of non-gaming revenue to pure gaming, slot win, table games hold percentages over a sustained, trackable period of at least five years, total gaming win per occupied room, etc.
My index is proprietary. I use it for consulting clients only. But I mention just these few metrics to impart a sense of how I attempt to go beyond the basic numbers of standard security analysis to form opinions on valuations. My objective now is to provide SA readers a view on where I sense some key gaming stocks are now headed after this charge up the hill of the past year.
Respecting the shortened attention span we all share in this era of instant info button clicking, I'm going to bypass the flood tide of metrics, charts, technical analysis that too often these days trigger MEGO responses and yawns to people who just want an educated opinion for now.
Let's take it sub-sector by sub-sector
Macau: For the last 12-month period GGR was $29.2 billion, up from $27.6 billion for the prior one year. For the first 120 days of 2017, GGR is up 13.8%. Putting these numbers in context, remember we are recovering against a peak GGR number in 2013 of $44.2 billion. The hit since then, triggered entirely by Chinese government crackdowns and the collateral damage currency flight restrictions produced, was monumental. It stopped growth dead in its tracks and has yet to come close to matching that number. But help is on the way. Despite upcoming quarters which historically tend to be somewhat softer that those just passed, we're still looking for a YoY increase of around 15% to 16% on average for 2017 GGR. That could get us to anywhere between $33.5 to $35 billion for the year. We're somewhat above consensus which runs about 13% going forward based on our estimate of the ramp up of GGR from the two new properties, LVS Parisian and Wynn Palace, to be joined in early Q4 by MGM's 1,400-room Cotai property.
This number is compounded out of our own metrics looking at hold percentages, average bets per gaming positions, total gaming positions on the floor, average win per hotel room, new infrastructure projects coming on line, non-gaming revenue trends and also total visitation by region or country.
Positive Catalysts for Macau
1. VIP is up, and more players are converted from day trippers to overnight stayers that contribute to all revenue streams.
2. Outward bound tourists from China reached 122 million last year and is still growing. Macau is the leading destination. As we've said in the past, these people are not coming to pet the pandas.
3.EV/EBITDA ratio of these stocks on average up from around 11.0 to 17.3 (Note here, that we do not have a single full year of operation for either Parisian opened last September or Wynn Palace opened last August).
4. Recent statements by Macau officials conducting audits of junket operators indicated they'd seen accounting procedural tweaks that were necessary to improve transparency but overall were satisfied that the industry was doing a good job in that area. Other statements supported a positive outlook by the government. Now agreed, this is China, and black swans have a habit of suddenly swimming into the Macau pond out of nowhere. Yet on balance, we are seeing a general rise in player confidence built off a widening belief that for at least the foreseeable the government isn't poised to pull any funny jokers out of the regulatory deck we can now envision. This provides some of the propulsion for recovery in the VIP segment and certainly doesn't hurt increasing mass as well.
5. MICE (meetings, incentives, conventions and expos) business in Macau is on a 1Q17 roll, up 100% YoY. Officials who track this metric tell us there were 344 meetings and conferences held, seven exhibitions, and 15 incentive events amassing attendance of over 222,000 people. This not only brings high margin income but also approval from officialdom which has tasked the industry to diversify visitation.
Cannibalization and headwinds
1. We think the feared cannibalization of existing LVS and Wynn properties after both operators opened new properties on the Cotai were put to sleep. What has happened is that some of the business has migrated to the Cotai, but on a total GGR basis, both companies reported gains. We see a continuation of this outcome when MGM opens its second property in Q4 this year.
2. The macro Chinese economy, especially the banking and real estate sectors, is getting shaky. Also there are worries about jobs and questions about just how much stimulus spending can be done to keep payrolls growing, if not actually shrinking. Our view: As jobs become a big issue in the macro economy, the job engine that is Macau takes on a greater perceptual value. More people will be hired, wages are moving north. There will be some potential bruising from macro events in the VIP sector, but this will be compensated by growing mass.
The Las Vegas Sector
Casino revenue on the Las Vegas strip has been essentially flat since 2013. Yet it has recovered nicely from the 2009 recession shock wave. Its non-gaming revenue continues to climb. REVPAR and occupancy percentages are up. Mostly the 43 million expected visitors this year is common sense proof that the town continues to have a reason to be because it remains, in the US, the single most desirable entertainment/gaming of all. In addition, population growth in Clark County, fueled by lots of in migration and job opportunities in other industries, will support excellent performances by "locals" casinos going forward. Conclusion: The US operators alluded to in this article should see continued, high occupancy, REVPARs and MICE business going forward, enough to produce its fair share of EBITDA contributions to their parent company's results.
The Regional Gaming Sector
US regional gaming operators are seeing some upside in the Midwest and West parts of the country but flat to slight declines in the South. Real GDP remains sluggish at best. Sectors of the US economy that impact gaming states are spotty. Yet ironically, casino revenue in Midwestern states where unemployment remains too high is flat to up low single digits (we see some buying opportunities in favorite regionals that we will share with our House Edge subscribers soon). Our overall take is neutral except for several we will be highlighting in the weeks to come.
The above named, Macau-Vegas-centric shares have had a great run thus far as we have pointed out. Our present thinking is that between now and Q4 we are in a hold situation. If periodical downside blips materialize as they always do in this sector, usually based on erroneous reports, we see that as an opportunity to buy into a 5% or more downside. Otherwise on the stocks mentioned above we're sticking with our calls to hold because we think the downside risk is minimum against a continuing move north inch by inch by the end of the year. We will revisit these again after the Q2 earnings release period.
Author's note: All my gaming stocks are held in a blind trust for my children and grandchildren so as to avoid any potential conflict of interest with casino 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.