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Gaming Guru

Howard Stutz

Regional casino markets show renewed life

1 December 2014

There is life in the regional casino markets.

Several states posted their best gaming revenue months in more than a year during October, fueling a boost in the stock prices of regional gaming operators.

As a whole, share prices of regional casino companies — including Boyd Gaming Corporation, Pinnacle Entertainment, Inc., Penn National Gaming, Inc., and Isle of Capri Casinos, Inc. — have outperformed the S&P by 19 percent in 2014.

Macquarie Securities gaming analyst Chad Beynon, however, remains cautious.

Beynon, who characterized his position on the regional gaming states as “neutral” over the last two years, said this week investors should take another look at the markets and the companies.

“We still believe many investors are not yet buying the recovery, even now, with what we believe are three-to-four months of proof,” Beynon said. “We believe regional gaming represents value and greenshoots of growth at this juncture.”

The regional markets have been hampered by lack of customers will ample discretionary spending dollars. However, recent economic trends, such as lower gasoline prices, have helped boost casino visitation in several states.

During October, Louisiana casino revenue increased 4 percent, the fifth straight monthly hike. Casinos in Pennsylvania, Iowa, Kansas, Missouri, and Mississippi also reported single-digit increases.

The 38 percent gaming revenue jumps in Ohio and Maryland during October were due to new casinos that opened in the states this summer.

“On the back of a ‘Goldilocks’ economy and gross gaming revenue that is finally in the black, we are positively adjusting our outlook,” Beynon said.

One company he upgraded was Boyd Gaming.

Beynon said other analysts have discounted the results produced by the Las Vegas-based casino operator’s regional properties. He said Boyd Gaming’s quarterly reporting methods — not breaking out results by property — doesn’t give investors a clear picture of the company.

“It is difficult to see highlights (and) low-lights, outside of (company) commentary, but we expect IP Biloxi (Miss.) to serve as a strong growth driver,” Beynon said.

As for Pinnacle Entertainment, Beynon said the company’s flagship L’Auberge Lake Charles, La., will face new competition with next week’s opening of the adjacent $600 million Golden Nugget Lake Charles. The casino is being built by privately held Landry’s of Houston, which is controlled by Tilman Fertitta.

Sterne Agee gaming analyst David Bain had similar concerns. He said the number of slot machines and table games in the market will double when the casino opens Monday. Lake Charles draws the bulk of its business from the Houston area, roughly two hours to the west.

“We agree with Pinnacle that the market will grow upon the Golden Nugget’s opening given another draw and current capacity constraints,” Bain said. “(Wall) Street is overly dismissive of the opening’s potential negative impact to L’Auberge at this point.”

Bain said Pinnacle’s stock price is up 11 percent since the middle of November, due to improved sentiment surrounding regional gaming.

“However, we struggle for empirical evidence of meaningful or sustainable market improvements,” he said.
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