Fantini's Finance

Three Picks for a Cautious Market

Even in a recession, opportunities exist, and winners still emerge

BY FRANK FANTINI

As this column is being written, we are still early in 2023 and waiting on the start of the fourth quarter earnings report season and the outlooks on the year that will accompany them.

As has been the case for a while now, there is a growing consensus among economic observers that the U.S. is headed towards a recession of some debated severity as the Fed continues to raise interest rates.

There also are signs that consumers are starting to cut spending, and, in many cases, undermining their future spending by running up credit cards and other debt.

That doesn’t bode well for consumer discretionary industries like gaming, although travel and experiential spending continues strong. Nonetheless, it can be expected that casino companies may grow cautious on capital spending in preparation for any downturn. That would not be bullish for games and gaming technology companies. However, a positive offset may be that new products such as cashless gaming can be sold as cost reducers.

And, of course, the proliferation of sports betting and online gaming continues to add new revenue, though by now investors have learned that profits do not necessarily follow as operators spend, in some cases wildly, to establish market share.

One result heading into earnings season is that some sell-side analysts have been paring earnings estimates and target prices. They may be correct. However, even in a recession, some companies grow and some stocks are undervalued. Below are three stocks that may be significantly higher a year from now even if the economy turns soft:

• Full House Resorts. We chose this small regional casino operator as our stock of the year in a report for digital subscribers to GlobalGaming Business and premium subscribers to Fantini’s Gaming Report.

The story is simple: Full House will open two transformational properties this year.

They are Chamonix, which is Cripple Creek, Colorado’s first resort-quality casino, and the aptly named The Temporary in Waukegan, Illinois, which will precede the permanent casino, American Place, Chicagoland’s only casino designed exclusively for high-end customers.

The back-of-the-envelope math is that if these properties, combining for more than $600 million in investment, generate a 15 percent EBITDA return that more than triples today’s base of $40 million or more.

That forecast may be conservative given that American Place will be the lone casino in Lake County, an affluent suburb of underpenetrated Chicago. A 20 percent return on the $425 million property is more likely.

Ditto for Cripple Creek, where Chamonix will immediately become the king of Colorado Springs, the state’s fastest-growing metro with a population today around 800,000. The role model is Black Hawk near Denver, where resort-quality Ameristar and Monarch casinos enjoy resort-size business volumes.

Full House’s stock has been selling around $8 a share recently. A price of $20 to $25 after the new properties prove themselves is not unreasonable.

• Golden Entertainment has long been one of our favorites and has rewarded us with a quadrupling of value even at recently fallen share prices.

Those prices in the $30s give investors the opportunity to buy into a company that analysts see generating more than $5 a share in free cash flow.

The big news at Golden is the pending sale of its Maryland casino for $260 million. That will allow it to reduce already manageable debt and perhaps pay a special dividend or provide an acquisition war chest.

But the underlying story is steady, if unspectacular, growth in a company riding southern Nevada’s population and economic surge:

• Continuing to open new taverns that generate up to $500,000 a year each in EBITDA;

• Ambitious post-Covid concert schedule at the company’s 12,000-seat events center in Laughlin across the street from its casinos;

• Cost-free development with the opening of Atomic Golf at The Strat in Las Vegas;

• Converting more Strat hotel bookings directto-consumer from online travel agencies in what amounts to a stealth rate increase;

• Continued transformation of the Strat from a low-budget operation into one whose business model is more akin to the typical Las Vegas Strip casino; and, investors and consultants with a focus on gaming.

• Cross-marketing Golden’s big local casino and tavern customer base to its resort properties.

In summary, Golden is a low-valuation stock with steady growth and maybe an acquisition kicker.

• Inspired Entertainment is a small company with big opportunities.

That is not unique. What separates Inspired from other small companies with grand ambitions is that it basically owns a rapidly growing gaming niche of vast potential, and its leadership has been there, done that.

Inspired is by far the leader in virtual sports, games that play simulated sports contests and horse races.

In more mature sports betting markets in Europe, virtual sports betting provides more than 10 percent of revenues. Translate that into North America where sports betting is seen as a $30 billion-$50 billion market.

In addition, Executive Chairman Lorne Weil is doing with Inspired what he did in building Scientific Games with betting machines in the U.K. and entering the lottery business, including the potentially huge iLottery sector.

More importantly, Inspired makes money, and profits are growing.

You can hear and watch Weil describe his opportunities in the video interview I conducted with him at G2E on the Fantini Research YouTube channel.

These companies aren’t the only good stories in gaming. There are numerous others among casino operators and games providers, many of which we’ll discuss as the year progresses. But they make a good starting point heading into an uncertain economy.