Fantini’s Finance

Good to be Bad

Financially, gaming companies are doing great, but why doesn’t that translate to higher share prices?

By Frank Fantini

Is this as good as it gets?

That appears to be the question many investors were asking after the torrent of secondquarter earnings reports. And based on the action in stock prices, their answer appears to be yes.

Casino operator after casino operator reported bang-up earnings beating expectations and pre-pandemic performance. CEO after CEO pounded the table about powerfully growing business volumes. They all but swore mighty oaths that they will maintain cost discipline as their properties fully reopen, thus sustaining record EBITDA margins.

Yet, the stocks hardly moved. Some actually slipped.

There were some exceptions among smaller companies. Golden Entertainment stock soared 9 percent to an all-time high on the day after its earnings release. Century Casinos soared 17.5 percent. However, the case could be made that both of those stocks had been way undervalued.

For most stocks, prices were mostly flat. Some remain well off of their 52-week highs, such as Penn National still cut in half from its high and DraftKings down a third.

The old Wall Street bromide is buy on the rumor. Sell on the news.

The 2021 version might be buy in anticipation of a recovery from Covid shutdowns and of maintaining high margins. Sell on the evidence that the recovery is in full swing and high margins are here to stay.

Oh, Oh Covid

As of this writing, the pandemic news is daily becoming more unsettling. Renewed travel restrictions are slamming Macau visitation again, and casino stocks there are near their lows.

In the U.S., a growing number of casinos again require customers to mask up, though operators say they don’t expect that to affect business.

No one, it appears, has much stomach for locking down the U.S. economy again, though if Covid continues to spread, attendance at major events such as concerts, sports contests and con ventions could be significantly affected.

The uncertainty doesn’t appear to be affecting stock prices yet but it also isn’t a catalyst for upward moves.

But there is a glimmer. The U.S. might be nearing the point where the virus has run its course. The combination of persons fully vaccinated and those already having had Covid is now over 60 percent. Add in persons partially vaccinated and the number is more like 70 percent. That is getting very close to the 70 percent to 80 percent needed to break the chain of transmission or, as we say in 2020s speak, herd immunity.

Let’s Make A Deal

Normally, when we talk deals, we’re talking about companies getting bigger through acquisition.

But we have two of the biggest gaming companies making big news this year by doing the opposite—Scientific Games and Caesars.

After the series of mergers that created today’s Sci Games, investors were told that the lottery is very complementary to the slots and table games business because it adds stable revenues.

The company also had created one-stop shopping: Want a slot machine? Look at what we’ve got. Want a casino management system? Got that, too. How about table games and their accessory products like automated card shufflers? Got ‘em. By the way, ya gotta buy a lottery ticket, too, because ya never know.

What happened, as it so often does, is that the deals that made sense to the financial engineers of Wall Street didn’t make sense in the real world of conflicting cultures, insecure employees, redundant product lines and a ton of debt piled up to create the behemoth.

But Sci Games over the past year made monumental changes. Financier Ron Perelman sold his controlling interest. Top executives of highly successful competitor Aristocrat were brought in, including former Aristocrat CEO Jamie Odell as executive chairman.

Odell and CEO Barry Cottle led a strategic review that resulted in the decision to divest lottery, now seen as slow-growing rather than adding valuable ballast, and sports betting in order to concentrate on what the company does best—games, especially in the fast-growing digital world. And, with proceeds from the divestitures, Sci Games will solve its debt problems.

On the operator side, Caesars will sell the international assets of William Hill for probably around $1.5 billion. Those proceeds also will go towards improving the balance sheet.

The sales also will allow Caesars to focus on what it does best, run casinos, and, importantly, converting a good portion of the industry’s largest database of proven customers into sports bettors and iGamers.

Caesars also has one more divestiture to go—a Las Vegas Strip property, which will add more money to improve the balance sheet.

With growing EBITDA above $1 billion a quarter, iGaming in its U.S. infancy, and free cash flow set to exceed $10 a share, it is easy to calculate a stock price of $150 a share compared to around $90 as of this writing. But the potential is greater as Caesars continues to become more efficient and achieves its growth strategies under the leadership of CEO Tom Reeg.

So, having earlier invoked one cliché, I’ll end with another appropriate to Sci Games and Caesars: Sometimes, you achieve addition through subtraction.

Frank Fantini is the editor and publisher of Fantini’s Gaming Report. For a free 30-day trial subscription email subscriptions@fantiniresearch.com.