Casino Companies Are a Terrible Bet (Chart Of The Day 17)

I believe that overall casino industry stocks will continue to weaken in the coming months.

Monarch Casino (MCRI)

Monarch Casino (MCRI) came out with quarterly earnings of $0.39 per share, missing the Zacks Consensus Estimate of $0.42 per share.  This compares to earnings of $0.31 per share a year ago.  Their most recent quarterly report represents an earnings surprise of -7.14%.  And the fact that we haven’t had a monthly close above 45 since September 2018 I believe is telling, suggesting weakness that hasn’t been abated.  Indeed, if we close below 45 this month, I think that may portend a bearishness that could see the stock tumble back down to 35 or even 30 in the coming months.

MCRI

MCRI (Barchart.com)

Boyd Gaming Corp (BYD)

In 2017, Boyd Gaming Corp (BYD) jumped from 19 to 40 in less than 12 months.  However, in the next 12 months, things completely reversed and the price tumbled back down to 19 again.

Earnings were worse than projected last year.  The 5-year earnings record, though, is positive. Long-term debt exceeds shareholder equity by ~3 times. The short float at 6.7% is a bit higher than the average stock. In December, Morgan Stanley analysts moved Boyd from “equal weight” to “overweight,” and they were correct as the price jumped early this year, but I think that move will be short-lived as the bears look to take control of this market — and this entire sector — in the coming months.

BYD

BYD (Barchart.com)

Millenial Malaise

Millenials — or people born between 1980 to 2000 — outnumber baby boomers 87 million to 76 million and they will account for one-third of all retail spending within the next five years.

They simply don’t gamble much, especially on slot machines, as earlier generations tended to do more.

Gaming now accounts for less than 37% of revenue on the Las Vegas Strip though millenials still go to Vegas regularly.  They seem to find the current slot product uninteresting and they want more agency over the outcome of the games, something that slots don’t really offer much.  Plainly, millenials also prefer nightclubs to casino gambling.

So, yes, they do spend some money in Vegas and they gamble; however, they simply don’t gamble on what casino heads want them to gamble on for revenue reasons: slots.

And this will continue to bode poorly for casino shares across the board in my estimation at least in the near-term.

WYNN and the Massachusetts Hearings

The Massachusetts Gaming Commission (MGC) will begin its hearings on Wynn Resorts’ suitability to operate a casino in the state on April 1. The commission will decide whether to impose a financial penalty on the casino operator for numerous sexual harrassment allegations that would be over and above the already-imposed record fine of $20 million dollars.

Wynn Resorts says it conducted its own internal investigation into the sexual misconduct safeguard shortcomings, revamped its board and executive management team, implemented a “Preventing Harassment and Discrimination Policy,” and now requires that all employees undergo sexual harassment training.

Wynn’s $2.6 billion Encore Boston Harbor is scheduled to open June 23, and they’re now taking reservations.  Indeed, the MGC’s decision to revoke the casino’s operating permit would suspend thousands of jobs, and likely lead to millions of dollars in lost tax revenue and regional economic benefits.

Also, Wynn Resorts has a debt load that has topped $10 billion, which is fairly high given that they’ve generated about $1.23 billion of EBITDA (“earnings before interest, tax, depreciation, and amortization”) last year.

I believe it’s possible that the MGC does pull the license or that there is a “buy the rumor, sell the fact” play-out of the share price even if they don’t pull it with regards to these hearings.

WYNN

WYNN (Barchart.com)

2018 & China

Casinos were a losing bet for US investors in 2018.

Most of the major US players finished the year down over 30% — their worst performance since the recession.

The Dow Jones US Gambling Index, which monitors American casino stock, showed the sector’s shares dropped 33% on the year, in comparison with a combined average drop of about 5.5% for other sectors.

djgamblingindex

Dow Jones US Gambling Index (Stockcharts.com)

I believe that this overall weakness will continue into the summer and perhaps even the Fall because this industry seems to have mounting headwinds — including a slowing Chinese economy — that haven’t really been challenged in terms of bullish evidence either technical or fundamental.

Macau gaming revenue growth is rapidly declining after both bad weather and slowing economic sentiment put pressure on Chinese gambling spending and I think this may put a damper on the sector-at-large in the coming months.

-Michael Hoeft

 

 

 

 

 

 

 

 

 

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