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The Gaming Industry Weekly Report

The Gaming Industry Weekly Report for 1/28/13
Alan R. Woinski, Editor
Gaming USA Corporation
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If you ever needed confirmation that analyzing and investing in gaming stocks is 95% mental, take a look back at the last 3 months or even the past year.   3 months ago, Penn National Gaming shares were looking rather sickly, finally validating our concerns over the decline in business we were expecting in the final quarter of 2012 and all through 2013 due to competition.    Those decline concerns are valid and finally being recognized by most analysts yet PENN shares are up 11 points from where they were on November 14th, and analysts are overwhelmingly bullish with most picking PENN as their number one regional gaming pick.  At the same time they are lowering estimates faster than you can say �Ohio�s casino market is underperforming.� 
Las Vegas Sands, Wynn Resorts and MGM shares were trading with a distinct lack of enthusiasm even though there were clearly signs that the negative sentiment on Macau by US investors, the views that VIP and overall growth was dead, were clearly being exaggerated.   To boot, it was right in front of everyone as the Hong Kong Macau names were trading up near all time highs while US Macau gaming stocks were still trading more than 20% on average below their 52 week highs.  Here we are in late January and the bears have all been converted, GGR estimates for 2013 have nearly doubled and VIP growth is back and showing all signs that it is not just a one quarter event.  
Analysts and investors turned on IGT last year when they announced they were buying the social gaming company Double Down.   Despite a whole host of companies following IGT into the Social Gaming space, IGT showing they did not necessarily make the wrong move buying Double Down as revenue is accelerating, earnings growth back in the 25% range, a higher than expected 1Q2013, and 30 million shares repurchased, IGT has barely made back half the decline of their stock last year.   While analysts have made it quite clear that between Superstorm Sandy, other bad weather, and the timing of the holidays, they do not expect much in the way of regional casino company earnings in the final quarter of calendar 2012, they criticized IGT�s gaming ops yields which, ironically, depend on regional casino business.  At the same time Isle of Capri Casinos popped for some unknown reason, becoming the biggest gainer YTD in the 2013 Portfolio.  You can�t get any more regional or more dependent on the economy than ISLE�s casinos.
The decision by Pinnacle Entertainment to expand in Lake Charles started the wheels turning on what eventually forced Dan Lee out as CEO.   The decision to kill that project helped the honeymoon period begin for Lee�s replacement, Anthony Sanfilippo.  His honeymoon with investors ended and PNK shares went into a dizzying death spiral after they announced plans to enter the Vietnam casino market.  PNK shares finally recovered and surged on the news they were acquiring Ameristar Casinos, an acquisition that will result in PNK doubling their size in Lake Charles with the project they abandoned coming back to them.  Caesars Entertainment shares rose nearly 20% this past week as news leaked that they were going to have a 40% stake in a South Korea casino project that may never get off the ground, making you wonder why the double standard between South Korea and Vietnam?
What this tongue in cheek history lesson is showing you is investor psychology is the driver of short term moves in gaming stocks, not fundamentals.   In the 1990s or even early 2000s, a supplier like IGT or SHFL projecting annual EPS of $1 or more would result in a share price of $20 to $40.  Now IGT is talking about $1.30 a share in EPS this year, a 25% growth rate and the shares are trading under $15?  Investors and analysts worry about the unofficial results given each week in Macau, if the Macau government is secretly planning to tape record Sheldon Adelson�s bowel movements and grant the number of tables based on that, yet in the meantime the Macau gaming market has defied everyone and could generate 350 billion patacas in gaming revenue this year.  Mike Leven, COO of LVS, was quoted as saying he thought the Macau gaming market could grow to 800 billion patacas a year.  LVS will have the biggest footprint on Cotai for many years to come, should easily generate over $4 billion in EBITDA this year, gave a 9% yield last year in overall cash dividends yet they are only trading a few points above their two year average share price and are 9 points away from their 52 week high, both obviously not accounting for the dividends granted.
If you look at IGT and LVS and say investors are acting a bit paranoid with both, that is why we focus on investor psychology.  If you are looking at PENN and PNK and realizing the deals are what gets investors excited and not fundamentals, once again we show you investor psychology at play.   What we are trying to do here is explain to investors why these stocks are acting like they are which allows you to decide if you are a long term or short term player and at the same time, give some helpful advice to companies who are wondering why in the world investors are treating their shares the way they are.  In 21 years we have never seen a period where gaming stocks trade where their fundamentals dictate they should be.  They are either too high or too low, with high volume showing momentum is at play or low volume showing a lack of interest by investors with the low liquidity adding to the woes.   The best thing is gaming stocks run in cycles, sometimes as long as 6 months to a year, but usually only lasting a quarter or two at most.
The entire gaming world will be watching NJ over the next 11 days to see if the chubby fingers of Governor Christie will sign the Internet gaming bill, if he will veto it, or if he will just not do anything, allowing it to go into law without his signature.  We believe it will be one of the last two as his comments this past week that he is concerned that Internet gaming will not help the AC casinos and that it could result in more gaming addiction kind of suggests it would be political suicide to sign the bill after those comments.  Governor Christie has already shown he is not up to speed on the gambling industry in the least bit with his support of Revel and refusal to turn his venom on the management of Revel, calling them out for their absolute failure. Christie�s potential opponent for the next Governor�s race has no qualms about saying the only way Revel turns around is if there is a complete restructuring and change of management and owners.
While everyone knows that we have been completely opposed to legalizing online gaming on a federal level, we do believe online gaming should be legalized in the state of NJ.   Our big concern about federal legalization is that it will result in less visitation to destination casinos.  In NJ that is not a problem because there already has been a distinct decline in visitation and it is not because NJ residents gave up gambling for lent 4 years ago and never started again.  Online gaming being legalized in NJ could actually keep some residents at home and away from casinos in PA, CT and NY.  The problem is that NJ is hardly the state that should be the trendsetter for online gaming as they would be sure to screw it up with marketing or promotions.   At the same time by legalizing online gambling you leave it up to the NJ Division of Gaming Enforcement and Casino Control Commission to avoid the potential destruction of the gaming industry by deciding on allowing PokerStars� parent company to buy the Atlantic Club casino. That would not only keep the path of destruction of AC casino business intact, it would also reduce the chances that the existing casinos can be successful at online gaming and open the doors to PokerStars, PartyPoker, Zynga and others fighting with PENN and PNK to dominate the US casino landscape.
Christie signing the online gaming bill or even doing nothing would also result in Senator Ray Lesniak actually being successful at something to do with gaming.   That could cause a ripple effect making 2013 the year when politicians that have no clue about gaming but really big mouths actually have some of their destructive plans go into place.  If Lesniak would actually get a gaming bill passed, that would mean Illinois� lawmakers could pass their gaming bill to allow 5 more casinos that are definitely not needed.  One of the Texas lawmakers who have had no chance of getting a bill passed could finally feel like there is hope and we could actually see a PA lawmaker get some sympathy in his campaign against casinos, trying to get them to issue statements to their customers.   Yes, Governor Christie�s signature or if he just did nothing could cause a ripple effect in the industry that could have horrendous results.   All in all, it probably would be better if Christie just stamped VETO.
Bloomberg reported Las Vegas Sands is shopping the Sands Bethlehem Casino in PA for $1 billion.  LVS COO Mike Leven did not deny that when asked about it on a CNBC interview but confirmed our view that LVS is just looking to sell if the price is right and would be more than happy to hold on if potential buyers were stingy.   If you are wondering why LVS is doing this, we think it is pretty simple.   LVS is not a regional casino company, in fact all their US operations are not even going to be generating 10% of their EBITDA by the end of this year.   They see companies offering to spend $800 million to over $1 billion on casinos in Maryland and Massachusetts, 11 bidders for Mass. casino licenses and a handful for a Philly license. Massachusetts is unproven with no reason to believe a casino will be open before the majority of the planned Cotai, Macau casinos are built yet casino companies are willing to waste time and money with fees and changes in development plans.  Maryland has been a huge disappointment and the one Philadelphia casino open has far from set the world on fire.  At the same time, lenders are willing to throw good money after bad on Revel even though the writing is not only on the wall that a restructuring has to happen, it is lit up in neon.   Is 9 times EBITDA too much to pay for what is the fastest growing casino in the United States?  A Massachusetts, Maryland or Philly license is going to cost on average more than $1 billion in the long run and 9 years from now will not even be close to have made that money back.
Speaking of Massachusetts, the Commission denied extension to four companies that wanted to give donations and applications but missed the deadline for various reasons.  That may wind up being the best thing that happened to them as the Gaming Commission chairman Stephen Crosby made it quite clear again that he wants to wring every last dollar out of the bidders and does not seem to care that every dollar that increases the budget reduces the potential return for the developer.  When you think about it, 11 casino companies played right into Crosby�s hands.  He will keep pushing, hoping that in each license location, at least one bidder decides they will win at all costs, pushing up the budget to a level where the other bidders throw up their hands and walk away.  That will make the Commission�s job easier and the locations will get much more elaborate and expensive properties.
While we don�t agree with this strategy as we believe the best gaming environment is one where the state believes the developer should share in the success, we understand that with competition comes greed and ignorance and that there will always be companies that do what the majority find ridiculous.  The nice thing about Massachusetts is they stab you in the heart instead of in the back, openly letting the companies know that if you want to bid, prepare to make as little return as possible.  The self-proclaimed gaming expert, Professor Clyde Barrow at UMass Dartmouth, said he thinks Raynham Park has a good chance at winning the slots license.   He said that is because it would be a close facility to the planned Mashpee Wampanoag tribal casino in Taunton.  Barrow said that the state would want another facility to take business because the slots facility would pay a higher tax rate.  Does that sound like a pleasant business environment? 
Obviously the state can look at it as where they can get the highest tax rate blend but chances are if they are looking at the slots facility that will give the best return, we think Cordish Cos.� track record speaks for itself.  Cordish�s PPE Casino Resorts supposedly is going to propose a 100,000 square foot slots parlor at the Liberty Tree Mall in Danvers.  While Dan Gilbert of Rock Gaming has shown he wants big city casinos, Cordish is showing they want their niche to be mall casinos.  The Boston Globe reported Cordish will propose a facility with up to 1,250 slots meaning the facility would be a lot more than just a box with slot machines, obviously looking much better than an old track with slots.
We have no idea what is going on in Iowa these days.   This was one of the first states to recognize saturation with regulators placing a moratorium on new development.  With local communities having to approve any potential new licenses even before regulators considered it, we felt Iowa would never get to a point where we questioned what in the world they were doing.   Now we have an anti-gaming Governor making a pro-gaming comment, that it is up to the people whether legal gambling expands in Iowa.   Considering Iowa was the first gaming state to get to a point where we considered the market mature, this is an odd remark from someone who supposedly is opposed to gaming.   The city of Davenport is buying the Rhythm City Casino from ISLE and thinks they will be able to get a company to develop another facility and operate it for them.   Sioux City, a market that was never a strong one to begin with, has a few bidders, including incumbent PENN, for a new facility and there will be a vote March 5th for Linn Country residents to decide if they want a casino developed in Cedar Rapids.  With a research firm with no gaming experience coming up with a study that suggests the tribal casino nearby would see the most cannibalization from the Cedar Rapids casino, not nearby casinos in Riverside, Waterloo and Dubuque, it looks like laughing gas may be in the process of being put in the air in Iowa.  The fact that a study for a potential new casino shows that cannibalization of the Meskwaki, Riverside, Waterloo and Dubuque casinos would occur should be enough to show there is no need for another casino.  If anyone thinks just because the Cedar Rapids casino was downsized it should be developed has been drinking too much Kool Aid or breathing in too much air in Iowa.
The Sioux City casino interest story took a strange twist with the news that Peninsula Gaming founder Brent Stevens would finance $35 million of the potential Hard Rock development, resulting in a 50% stake.   There are two proposals from PENN, a Ho-Chunk Tribe proposal that we did not think had much of a chance and the Hard Rock proposal that had questionable financing.   We were ready to say PENN had it wrapped up but now with Stevens getting involved, we think the playing field has been leveled.  It should be interesting to see what happens with this although we still don�t see what the is the attraction of a Sioux City casino.
With more and more media sources and analysts coming over to our view on saturation, we wonder when it will reach the mindset of regulators, politicians and executives?   The latest is a Plains Dealer story in Cleveland which questioned why, with the early slot results in Ohio being so below expectations, nobody is questioning whether the state should go from zero gaming machines a year ago to nearly 22,000 in a couple of years.    The article said the expansion raises the question of how much gaming the Ohio market will bear but we also think what everyone is missing is not only how many slots the Ohio market can bear but also the negative impact that has been seen on neighboring states� casinos/racinos and what they will do about it.
Some Indiana politicians made it sound like they had an answer to the competition from casinos in Illinois and Ohio that are wreaking havoc on gaming tax revenue, something that will get worse as the Cincinnati casino/racinos open.  The answer from some lawmakers is to move the casinos on land, lower taxes and fees and allow the racetracks to have table games.   While some will say this will preserve jobs, we think this proves why nobody trusts politicians.  To us this is veiled attempt to save Centaur from what will probably be a move in their competitive battle with Trump Entertainment to see who can get into financial trouble the most times in the gaming industry.  It would definitely benefit the casinos to move on land but it only makes sense if there is incentive, which would be the lower taxes and fees, something that will cause the biggest issue with lawmakers.  For Southern casinos, any move on land and lower taxes makes no sense at all if they have to worry about new competition from within, the two racetracks getting table games.   These casinos would then not only have to worry about new casinos in Ohio but also new supply in their own state.  There is no way any lawmaker, even those in Congress, would be dumb enough to think giving racetracks table games will help casinos that are already struggling with competition from neighboring states that will only get worse.   The racinos made their beds when they were dumb enough to pay that astronomical upfront fee.   You don�t sacrifice an entire industry because two companies were not intelligent enough to understand they would not be able to make it with what they agreed to.    The state�s Legislative Services Agency believes the bill would result in a loss of $149 million to $231.2 million to the state general fund in fiscal years 2014-2015.  This will be enough to get a good portion of lawmakers opposed to the reductions in fees and taxes.  While the Casino Association of Indiana is trying to sway opinion, talking about preserving jobs, not capital, they should be more concerned about what would be the worst case scenario.   The racinos being allowed table games, the casinos being allowed to move on land and no measurable tax relief is the worst case scenario and that is what the industry is being set up for.
NY State Assembly Speaker Sheldon Silver is demanding Governor Cuomo give the locations of casino sites before the measure goes before lawmakers.  The Governor gave more details saying the only places off limits for the first 3 casinos would be NY City, Long Island or Westchester, Putnam and Rockland Counties.   We are now back to our view that Governor Cuomo is using this casino threat as a way to get the Seneca Tribe to pay up and the Oneidas to strike a deal and start paying.  The Wall Street Journal published a story saying the Governor was not happy to hear that the biggest casinos companies are not willing to give financial support to his push as they have no interest in putting casinos upstate.  We don�t think Governor Cuomo would be surprised by this in the least bit.   We think the Governor is in a position where he can force the Senecas to pay up, scare the Oneidas into striking a deal to get protection against competition and/or give the racinos table games as long as they continue to pay the highest tax rates in the history of US gaming.  In December Resorts World at Aqueduct alone took in more than any Atlantic City casino at $59.7 million and that was without table games.  In fact Resorts World alone paid more to the state of NY than all the AC casinos to NJ combined in December.   This puts Governor Cuomo in the best position of a Governor in any gaming state in the US right now.
The process to award the Prince George�s County 6th license in Maryland will start this coming week with MGM definitely in the mix and PENN possibly trying to delay or convince regulators not to put Rosecroft Raceway out of business.   Any chance of Question 7 not going into full effect, including the additional license and table games for the rest of the casinos, was put to rest when an Anne Arundel County Circuit Court Judge rejected the lawsuit seeking to declare the Question 7 vote invalid.   The judge pretty much ruled the opponent�s attempts to void the vote on a technicality were baseless.   While the actual wording of the gaming law did suggest that any changes must be approved by a majority of all voters, the judge dismissed the argument saying the intent was clear that it was the voters in the election.
A Virginia lawmaker is making a half-hearted, which sounds better than what we really wanted to say, attempt to legalize casinos.  SB714 is a proposal that would allow casinos in place of tolls to fund transportation projects in Hampton Roads.  It just barely passed a Senate subcommittee meeting but we think there is a better chance of Governor Christie becoming a Weight Watchers spokesperson than this bill passing.
Instead of just prodding developers, the Mississippi Gaming Commission wants to put it in writing that the casinos developed in the future have to be more elaborate, which means more expensive.   Considering the casino developments that have been approved or are trying to be approved are all having a difficult time getting financed, this is actually a good bill because it will force real developments that can help the market instead of undercapitalized companies trying to chase a dream�. or in some cases trying to hype a stock price.  The reality is that the last two casinos developed in Mississippi, the Margaritaville in Biloxi and Magnolia Bluffs Casino in Natchez have and will not do anything to increase visitation and instead are just cannibalizing existing casinos.  The new regulations would raise the number of hotel rooms required to 300 from 250 and change the hotel quality to 4 star from 2 star.   Casino floors would have to be at least 40,000 square foot, a restaurant that seats 200 and a fine dining one that seats 75 must be included, and there must be space to park 500 cars.   Those developers that have been trying to get projects approved for years will have 180 days to present their projects under current regulations or be subject to the new ones.
In Nebraska, a surprise proposal from Senator Schumacher wants to take the casino decision out of the voters hands.  Usually we have politicians pushing to get the vote out of their peers hands and let the voters decide.  Schumacher wants state residents to vote to allow casino decisions to be made by lawmakers, not by the power of the people.
Rhode Island lawmakers are considering raising the legal age to gamble from 18 to 21.  With Twin River getting table games, the racinos no longer can say they have lottery games.
FutureLogic Inc. announced Novomatic has selected their PromoNet promotional couponing system for gaming operations in Europe and Latin America.   The premier installation will take place at the Casino Admiral Colosseum in the Czech Republic.
Pinnacle Entertainment announced the retirement of John Giovenco from their board of directors.
Century Casinos announced the extension of their long term concession agreement with TUI Cruises.   TUI Cruises is a joint venture between TUI AG and Royal Caribbean.   CNTY will operate the casinos on board TUI ships until at least May 2017.
Gateway Casinos can now move ahead with a plan to redevelop an existing bingo hall into a bigger gaming center in Newton now that Surrey city councilors defeated a casino measure by a narrow 5 to 4 vote.  Gateway was holding off to see if their bid for a much larger south Surrey casino complex was passed.
The Seminole Tribe debuted a $25 million makeover for their original bingo hall developed in 1979.   The Seminole Classic Casino took 6 months for the makeover and now includes bingo, slots and table games.
Downstream Casino and Hotel in Oklahoma celebrated the grand opening of its phase two project with the addition of the new Kappa Hotel Tower which includes a hotel, bar, caf� and spa.
Caesars Entertainment and Lippo Group will move forward with plans for a $500 million casino development in Incheon, South Korea.  Under the agreement, CZR will hold 40% of the joint venture and manage the casino with Lippo owning 20% and an unnamed partner holding the remaining 40%.  This is far from ready to begin construction as the venture has a lot of hoops to go through and they have to find someone to fund them knowing they have a very hostile and unpredictable neighbor to the North.
The US Dept. of Justice has filed notice that it is joining the lawsuit by the NCAA and professional sports leagues to stop NJ from instituting sports betting.  That knocking sound you are hearing is Senator Lesniak banging his head against the wall.
Penn National Gaming signed a lease to renovate a former restaurant in Gloucester Township and turn it into NJ�s fifth off-track wagering facility.   Favorites at Gloucester Township will be located at the former Stone Grille in southern NJ.  Barring any snags in getting local and state approvals, the OTW facility is expected to be open in late summer 2013.
SHFL Entertainment announced the hiring of Michael Daly as VP of online gaming.  Daly was most recently senior director of the Interactive Division at Bally Technologies.
The battle over the potential privatization of the Pennsylvania Lottery is continuing but now the casinos better pay attention.  Part of the deal with Camelot is that they would be instituting new games to be able to generate the results they are predicting.  This includes Keno in bars and restaurants.   Five Republican Senators want to make sure Camelot does not compete with the casinos but the industry better be sure they don�t hurt the casinos this way.   They want the Governor to ban online gaming to avoid competition with the state�s casinos.  The problem is if they ban online gaming to stop Camelot, it means the casinos will not be able to offer it when all the states around them finally do.  What a mess this has become for the Governor and the state.
The Delaware Lottery launched Keno instant lottery terminals at 81 bars, restaurants, and other private businesses.  In NY, Governor Cuomo wants to expand the Quick Draw keno game from just bars and restaurants and into convenience stores, along with lowering the age to play to 18 from 21.   We have to tell you we think Keno is a ridiculous and boring game.  If NY could take in $500 million in sales a year at 7,972 locations, they would take in 3 times as much if they did what Illinois is doing and put in five VGTs in bar and restaurant locations.
Louisiana December gaming revenue rose 4.7% to $211.4 million.  Taking out PNK�s L�Auberge Baton Rouge, same store revenue was down 0.7%.  PNK was up 19% statewide but down 2.6% on a same store basis with L�Auberge LC flat, offsetting much of the declines at Boomtown Bossier City and New Orleans.   L�Auberge BR generated $11 million and knocked 27.8% in revenue from PENN�s Hollywood Baton Rouge.  BYD was up 2.9%, including the Peninsula properties and CZR was up 4.7%.  
Kansas December gaming revenue totaled $30 million with BYD�s Kansas Star generating $15.8 million of that.  PENN�s Hollywood Casino took in $10.9 million and Boot Hill generated $3.3 million.
Colorado December gaming revenue rose 8.2% to $61.1 million.  Cripple Creek was up 11.5% and Central City was up 11.4% but Black Hawk�s 7.1% increase took them to more than 2/3rds of the revenue at $45.4 million.


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