Wall Street execs see plenty of positives in gaming industry

June 14, 2017 12:03 AM
  • Nick Sortal, CDC Gaming Reports
June 14, 2017 12:03 AM
  • Nick Sortal, CDC Gaming Reports

Money talks, and when those who handle the money talk, casino leaders listen.

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Such was the case last week when four experts gave Wall Street’s perspective of the gaming market. The presentation was part of GameOn, a two-day conference for casino gaming operations executives across the country, sponsored by the gaming company AGS and held at the MGM National Harbor in Maryland.

The news was mostly good. The experts said that casino fundamentals are strong, with a boost from table games. Additional mergers and acquisitions are forthcoming. And even though skill-based games have yet to provide a solid revenue source, investors will continue to be interested.

“The past couple of years, from a gross gaming revenue standpoint, it’s been at GDP or just a little short,” said Chad Beynon, an analyst with Macquarie Capital. “The trends are pretty positive, although earlier this year there were some weather issues in certain parts of the country. But the data we’ve seen so far is pretty good.”

Beynon said he also is encouraged by the upcoming gaming products he has viewed at shows.

“There’s a lot of good stuff out there,” he said, citing IGT’s new products, but added that projections have to be very approximate until the games are actually played.

Brad Boyer, associate VP of equity research for St. Louis-based Stifel Nicolas, said investor sentiment is also strong, with a “nice tailwind” behind Macau, fueled by VIP play, as well a wave of consolidation.

And he agreed with Beynon, expanding on his thoughts. “On the equipment side, I think investors have become too focused on the numbers and not on the legacy model of the industry. Relationships and creativity are important. I don’t know if the folks I talk to appreciate that slashing your R&D budget is not sustainable over the longer term.

“Creativity basically determines the long-term viability of a business in this industry; I think some of these folks who have come in from outside of the industry and try to treat these companies and start making drastic changes can make things look pretty for a quarter or two but there are long-term ramifications.”

Todd Eilers, a partner with Eilers & Krejcik Gaming, LLC, noted that recent casino numbers show Native American and commercial casinos producing nearly equal revenues.

“Half the market is tribal and half of the market isn’t that sexy. The tribal market has fared much better than the traditional market in the past five years. But investors are smart. They pick it up pretty quick.”

Beynon noted that the revenue increases for Native American casinos has meant gains for slot manufacturer Konami. “Konami became a more important company in our universe because of what they’re doing in Native American casinos,” he said.

The low cost of capital fueled a very busy first and second quarter for mergers and acquisitions, noted Joel Simkins, managing director of gaming and leisure investment banking, for SunTrust Robinson Humphrey. “I’d say right now we’re in a bit of a logjam,” Simkins said. “Everyone is very proud of their assets right now. There will be more mergers and acquisitions going forward.”

Beynon, who does equity research in casinos, hotels, and movie theaters, noted that Caesar’s emergence from bankruptcy in mid-August could bring more action. “They’ll have $1.6 billion or $1.7 billion to buy other casinos or use a REIT as a partner to burn down a multiple,” he said. He praised Eldorado’s acquisition of Isle of Capri casinos: “It was certainly a big one and everyone believe Isle needed to be part of something bigger and Eldorado needed to be part of something bigger. So that was a good marriage.”

Eilers noted that table games revenue has become a larger piece of the pie, rising from 15 percent of gaming revenues to about 20 percent. “A lot is driven by live tables being added [because of overall casino expansion] but even if you strip that out, you’re seeing a gradual increase in table game revenue,” Eilers said. “Maybe that speaks to the younger demographic.”

Simkins also sees possible growth via regional casinos adding amenities. “They’re asking what they can bring in to attract new customers,” he said.

That conversation, naturally, led to the prospect of attracting more millennials and the prospect for skill-based games. AGS President and CEO David Lopez, addressing the panelists, noted that companies such as GameCo and Gamblit “are cutting the trail for the future. Someone’s going to break through.”

Boyer said, “As long as people out there are talking about skill-based games they’ll attract capital from private investors. People are willing to come in hope to crack the golden egg.” Added Simkins: “It’s no different than why you play that progressive jackpot. It’s risk capital.”

As a side note, Boyer said that he sees a trend of committing more capital dollars to non-gaming and less to the casino floor in regional casinos. “Having a new restaurant and getting some revenues there or from some other entertainment is just a better return opportunity,” he said. “It kind of ties back.”