Wall Street execs talk slots, Isle sale, Caesars’ next move

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

Such was the case earlier this month when four experts gave Wall Street’s perspective of the gaming market during GameOn, a two-day conference for casino gaming operations executives across the country, presented by AGS at the MGM National Harbor near Washington, D.C.

The news was mostly good. They say casino fundamentals are strong, with a boost from table games. Some more 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 adds projections can be indefinite until the games are actually played.

“If Whole Foods has a new lower priced concept and 1,000 units, that’s a tangible number you can put into your number. That doesn’t quite translate to our product.”

Brad Boyer, associate VP of equity research for St. Louis-based Stifel Nicholas, 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 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 marking drastic change can make things look pretty for a quarter or two but there are long-term ramifications.

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

“Half the market is tribal and the markets that aren’t the sexiest. 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, notes 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. Meanwhile, 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.”

Ellers 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,” Ellers 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 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 says 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.”

Twitter: @NickSortal