Cover, Applied Analysis Applied Analysis Gaming Index

September 2013

Across the Board, Gaming Stocks Climb in August

After reporting two consecutive months of declines, gaming stocks witnessed positive growth in August of 2013. All of the companies included in the Applied Analysis Gaming Index (AAGI) witnessed increases in average daily stock price when compared to July 2013 and August 2012. The broader market also reported similar trends in the latest period. During August 2013, the AAGI reported a composite score of 497.83, up 5.0 percent from the prior month and 26.1 percent from a year ago. Caesars Entertainment (CZR) witnessed the most substantial month-to-month gain in average daily stock price, rising 18.8 percent to $18.32. In addition, Bally Technologies (BYI) was up 12.2 percent, while MGM Resorts International (MGM) increased 10.4 percent. WMS Industries (WMS) reported relatively flat stock performance (daily stock price) during the month, up just 0.2 percent from July 2013. Penn National Gaming (PENN) and Boyd Gaming (BYD) followed with monthly growth of 1.1 percent and 2.8 percent, respectively. The S&P 500, when computed on a similar basis, witnessed a 3.4-percent month-to-month increase and an annual gain of 19.1 percent. Note, Pinnacle Entertainment's (PNK) acquisition of Ameristar Casinos (ASCA) closed during the month, eliminating Ameristar from the AAGI. Selected earnings reports during the past month included the following:

  • MGM Resorts International (MGM) - MGM Resorts International (MGM) reported a 3.4-percent annual increase in net revenues at its Las Vegas properties during the second quarter of 2013, rising to $1.2 billion. Meanwhile, adjusted EBITDA was $310.0 million, up 15.0 percent. MGM Grand witnessed the most substantial revenue and EBITDA growth during the year, up 10.9 percent and 71.0 percent, respectively. The company continues to move forward with plans to build a $350-million arena with AEG and recently announced that Populous will be the architect. The project is expected to break ground in the summer of 2014.
  • WMS Industries (WMS) WMS Industries reported net revenues of $202.8 million in its fiscal fourth quarter of 2013, up 3.5 percent from the same period a year ago. The latest performance is primarily attributable to a 32.8-percent increase in gaming operations revenues. However, the increase was offset by a 10.3-percent decline in product sales revenues, which fell to $119.4 million. Although new unit shipments to the U.S. and Canada increased 1.5 percent year-over-year and new unit shipments to international markets increased 39.4 percent, used unit shipments declined 66.2 percent. Total unit shipments fell 12.7 percent to 7,698; the average sales price per new unit fell 3.4 percent to $15,443. WMS Industries is in the process of being acquired by Scientific Games (SGMS).
  • Bally Technologies (BYI) - Bally Technologies reported a 7.6-percent increase in net revenues to $264.4 million during the company's fiscal fourth quarter of 2013, due to substantial increases in gaming operations revenues and systems revenues. Gaming operations revenues increased 9.7 percent to $102.8 million. Meanwhile, systems revenues increased 31.8 percent to $72.9 million. Gaming equipment revenues declined 8.4 percent to $88.7 million, primarily attributable to fewer casino openings. New gaming devices declined 7.7 percent to 4,911, while the new unit average selling price fell 5.6 percent to $16,224. On August 27, 2013, Bally Technologies' proposed acquisition of SHFL Entertainment moved one step closer to completion. The companies announced the completion of the waiting period required under the Hart-Scott-Rodino Antitrust Act of 1976 without the Federal Trade Commission raising any concerns. The transaction is still awaiting approval from SHFL's shareholders and the necessary regulatory agencies.
  • SHFL Entertainment (SHFL) - Net revenues for SHFL Entertainment increased 16.0 percent during the company's fiscal third quarter of 2013 to $73.5 million. Each revenue source reported increases from the same period a year ago, with electronic table systems revenues reporting the greatest year-over-year increase of 78.8 percent. Electronic gaming machines revenues increased 16.1 percent to $23.2 million due to increases in placements in Asia and the average selling price. Utility revenues witnessed the least year-over-year increase, rising 5.2 percent to $25.6 million. The latest performance is attributable to an 11-percent increase in shuffler sales.

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September 2013

Gaming Equipment Manufacturers Outperform Operators in July

Gaming stocks declined for the second consecutive month in July of 2013. The operators included in the Applied Analysis Gaming Index (AAGI) reported mixed results when compared to the prior month, while all of the gaming manufacturers witnessed month-to-month gains. The broader market performed slightly better during the month, with relatively no change in closing price. In July of 2013, the AAGI fell to 474.18, down 1.8 percent from the prior month. Compared to a year ago, the index reported an increase for the third consecutive month, rising 23.5 percent. Four companies included in the AAGI reported month-to-month declines in average daily stock price. Penn National Gaming (PENN) witnessed the greatest decline, falling 3.0 percent. Meanwhile, Wynn Resorts (WYNN) fell by 2.4 percent, Las Vegas Sands (LVS) fell by 1.5 percent and Boyd Gaming (BYD) fell by 0.2 percent. SHFL Entertainment (SHFL) witnessed the greatest increase in average daily stock price when compared to the prior month, rising 16.5 percent. Bally Technologies (BYI) and Caesars Entertainment (CZR) were both up by about 15.2 percent. The S&P 500, when computed on a similar basis, remained relatively flat from the prior month. Compared to a year ago, the broader market increased 19.0 percent. Selected earnings reports during the past month included the following, with particular attention centered around recent Las Vegas operating performances:

  • International Game Technology (IGT) - International Game Technology reported an 8.7-percent increase in net revenues during the company's fiscal third quarter of 2013, rising from $532.8 million to $579.0 million. The latest performance is largely attributable to gains in product sales and interactive revenues, which were offset by a decline in gaming operations revenues. Product sales revenues increased 11.9 percent to $259.2 million. Although the average machine sales price fell 2.9 percent to $13,300, the number of units recognized increased 15.5 percent to 13,400, primarily due to an increase in North American units. Interactive revenues more than doubled compared to a year ago, rising to $72.5 million, primarily due to a 60-percent increase in bookings per daily active user. Despite gains in product sales and interactive revenues, gaming operations revenues declined 4.2 percent to $247.3 million. Average revenue per unit per day fell 4.5 percent to $47.96.
  • Penn National Gaming (PENN) - During the second quarter of 2013, Penn National Gaming reported net revenues of $761.4 million, up 6.8 percent from the prior year period. Adjusted EBITDA reported a substantial 11.4-percent increase, rising to $211.4 million. The company reported a 7.1-percent increase in gaming revenues during the quarter, which rose from $634.8 million to $679.8 million. Food, beverage and other revenues witnessed a more substantial increase, rising 10.1 percent to $121.0 million. The East/West segment, which includes M Resort in Las Vegas, was the only segment to report a decline in net revenues and adjusted EBITDA in the second quarter. Net revenues fell 9.1 percent to $317.1 million, while adjusted EBITDA fell 3.3 percent to $95.1 million.
  • Las Vegas Sands (LVS) - Top-line revenue growth in the Las Vegas market for LVS was important. The Venetian Las Vegas and the Palazzo reported net revenues of $345.7 million in the second quarter of 2013, representing an increase of 5.6 percent when compared to the prior year period. Adjusted EBITDA declined 2.2 percent to $63.0 million, while EBITDA margin fell to 18.2 percent. Food and beverage was the only revenue source to report a year-over-year decline during the quarter, falling 2.2 percent to $65.7 million. Casino revenues increased 11.1 percent to $105.1 million, while convention, retail and other revenues rose 4.7 percent to $75.7 million. Room revenues were $120.6 during the period, up 6.9 percent from the prior year. Although average daily room rate ("ADR") was flat at $205, the occupancy rate increased 5.4 points to 91.6 percent, resulting in a 6.8-percent increase in revenue per available room ("RevPAR"). During the quarter, Las Vegas Sands repurchased approximately $46.5 million of common stock. In addition, the company paid a recurring quarterly dividend of $0.35 per share, up 40 percent compared to the prior quarter.

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July 2013

Gaming Equipment Manufacturers' Stock Gains Not Enough to Offset Operators' Slide

Gaming stocks retreated slightly during the month of June 2013, which ended the three-month run of positive performances. Every operator included in the Applied Analysis Gaming Index (AAGI) experienced declines in their stock price during June, while most gaming equipment manufacturers trended in the opposite direction. Profit-taking likely impacted valuations during the month as speculation about sustainability impacted investment decisions. The sector also aligned with broader market movements. During June 2013, the AAGI reached a composite value of 482.87, which was down 3.3 percent from the preceding month, but remained 19.6 percent above the same period of the prior year. Price declines from a couple of the larger-cap companies impacted the overall index as Las Vegas Sands (LVS) dipped 4.79 percent and Wynn Resorts, Ltd. (WYNN) edged down 4.15 percent. SHFL Entertainment (SHFL) was the largest gainer with its average daily stock price increasing by 8.49 percent during the month. The broader equities markets also trended in generally the same direction. The S&P 500, when computed on a similar basis, was down a modest 1.3 percent in the month. Compared to the same period of the prior year, it was up 22.3 percent. Selected reports and industry events during the past month included the following:

  • MGM Arena Deal – AEG and MGM Resorts International (MGM) recently completed the details of their joint venture to build a 20,000-seat arena near New York-New York Hotel & Casino and Monte Carlo Resort and Casino as part of the area’s new entertainment district. The $350-million arena project is expected to break ground in summer of 2014, with completion planned for spring of 2016. Populous, which has designed a number of sports, concert and entertainment venues around the world, including Kansas City’s Sprint Center and London’s O2 arena, was chosen to design the venue.
  • MGM-Hyatt Deal - Hyatt Hotels Corporation (H) and MGM Resorts International (MGM) recently announced an agreement to offer increased benefits to members of their loyalty programs. Hyatt Gold Passport members will now be able to earn and redeem Hyatt Gold Passport points at participating MGM Resorts in Las Vegas, while M life members will be able to earn M life Tier Credits when staying at any Hyatt hotel or resort in the world.
  • Las Vegas Sands Share Repurchase Program – Las Vegas Sands Corp. (LVS) announced earlier this month that its Board of Directors approved a multi-year share repurchase program with an initial authorization of $2 billion. Also, this year, the $1.00 per share per year recurring dividend that was approved in 2012 was increased to $1.40 per share per year.
  • Pinnacle Acquisition of Ameristar Appears to be Moving Forward - During the month of June, Pinnacle Entertainment (PNK) reached an agreement with the Federal Trade Commission regarding its proposed acquisition of Ameristar Casinos Inc. (ASCA). The Commission issued a complaint in May with concerns that the merger could reduce competition in Missouri and Louisiana. Since then, Pinnacle has made plans to sell its Lumiere Place Casino, HoteLumiere and the Four Seasons Hotel in St. Louis, Missouri as well as Ameristar’s casino hotel development in Lake Charles, Louisiana. The company also obtained approximately $2.86 billion in loans to support the acquisition. Since the proposed $2.8 billion buyout was announced in December of 2012, it has received approval from gaming regulators in Nevada, Mississippi, Iowa and Indiana. The deal is on track to close in the third quarter of this year.

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June 2013

Gaming Stocks Rise Across the Board

The gaming sector continued its upward momentum for the third consecutive month. The Applied Analysis Gaming Index (AAGI) posted a 5.4-percent increase in May 2013 when compared to the preceding month. On a year-over-year basis, the index surged 14.6 percent as every company included in the AAGI posted gains in the average daily stock price on both a month-to-basis and with respect to annual comparisons. The industry benefited from broader equity market gains and additional insight from quarterly earnings reports. The S&P 500 posted a 4.4-percent increase from the prior month and remains 22.3 percent higher than one year ago. The largest stock price gain was posted by Boyd Gaming (BYD), while MGM Resorts International (MGM) and Pinnacle Entertainment (PNK) reported double-digit growth rates. The largest contributor to the index was Wynn Resorts, Ltd. (WYNN) due to a 9.8-percent rise in its valuation and its relatively heavy weighting given its market capitalization. Las Vegas Sands (LVS) also posted a positive contribution of 8.78 points with a stock price increase of 6.4 percent during the month. Selected earnings reports during the past month included the following:

  • Las Vegas Sands (LVS): Net revenues for Las Vegas Sands increased 19.5 percent year-over-year in the first quarter of 2013 to $3.3 billion, while adjusted EBITDA increased 9.4 percent to $1.2 billion. The latest results are primarily attributable to record results at the company’s Macao properties. In Las Vegas, net revenues increased 7.0 percent to $411.5 million, due to increases in each of the revenue sources. Casino revenues increased 0.8 percent to $159.9 million, due to a table games hold percentage of 27.6 percent, which is higher than the expected range of 20 to 22 percent. Room revenues increased 6.8 percent annually to $121.1 million, due to a 7.3-percent increase in revenue per available room (“RevPAR”) to $191. Although average daily room rate (“ADR”) declined 1.4 percent to $211, the RevPAR growth during the quarter was driven by an occupancy rate of 90.3 percent, up 690 basis points (6.9 percentage points) from a year ago. Food and beverage and convention, retail and other revenues also reported year-over-year increases, up 12.0 percent and 14.2 percent, respectively. Meanwhile, adjusted EBITDA in Las Vegas declined 2.1 percent to $113.4 million, while EBITDA margin fell 260 basis points (2.6 percentage points) to 27.6 percent.
  • MGM Resorts International (MGM): MGM Resorts International reported net revenues of $2.4 billion during the first quarter of 2013, up 2.8 percent from the same period a year ago. Adjusted EBITDA increased 20.3 percent to $573.6 million. The company notes that its latest results are attributable to strong performances from its properties on the Las Vegas Strip, record results at MGM China and an all-time record at CityCenter. In Las Vegas, net revenues increased 2.4 percent year-over-year to $1.2 billion, while adjusted EBITDA increased 18.4 percent to $297.3 million. The revenue and EBITDA growth was primarily driven by MGM Grand Las Vegas, which reported increases in net revenues and adjusted EBITDA of 11.4 percent and 66.1 percent, respectively. ARIA, which is not included in the total results for Las Vegas, reported net revenues of $258.5 million, up 37.6 percent year-over-year. Adjusted EBITDA quadrupled to $77.6 million. Overall, the Las Vegas Strip properties reported RevPAR of $118, up 0.9 percent from last year. New York-New York reported the greatest increase in RevPAR, rising 4.8 percent to $109, due to a 2.7-percent increase in ADR and an increase in occupancy rate of 170 basis points (1.7 percentage points). ARIA witnessed a 5.1-percent increase in RevPAR, with a 2.0-percent increase in ADR and a 260-basis-point (2.6 percentage point) increase in occupancy rate. Notably, the company recently completed construction on the Hakkasan nightclub and restaurant at MGM Grand Las Vegas. In addition, MGM Resorts recently announced plans for a 20,000-seat arena and entertainment district located near New York-New York and Monte Carlo. The company is partnering with AEG to complete the project.
  • Caesars Entertainment (CZR): Caesars Entertainment reported net revenues of $2.1 billion in the first quarter of 2013, down 2.9 percent from a year ago. Property EBITDA declined 12.4 percent to $487.4 million. The company notes the latest performance is attributable to declines in the number of visitors to its properties. In Las Vegas, net revenues declined 2.6 percent to $751.7 million, while property EBITDA fell 6.3 percent to $197.9 million. Casino revenues fell 5.7 percent year-over-year, while hotel revenues declined 3.4 percent, due to a 1.1-percent decline in ADR and a decline in occupancy rate of 140 basis points (1.4 percentage points). Food and beverage revenues increased 8.2 percent during the quarter, due to new restaurant openings, including Bacchanal Buffet and Nobu at Caesars Palace and Gordon Ramsay-branded restaurants at Caesars Palace, Paris and Planet Hollywood. The company notes that its operating results in Las Vegas were negatively impacted by Project Linq construction costs and renovations at the Quad and Bill’s Gamblin’ Hall & Saloon.
  • Pinnacle Entertainment (PNK): Pinnacle Entertainment reported net revenues of $312.6 million in the first quarter of 2013, up 6.7 percent when compared to the same quarter a year ago. However, adjusted EBITDA declined 0.9 percent to $73.9 million, while EBITDA margin fell 181 basis points (1.8 percentage points) to 23.6 percent. Lodging was the only revenue source to report a year-over-year decline during the quarter, falling 6.4 percent to $8.0 million. Retail, entertainment and other revenues witnessed the greatest annual increase, rising 17.1 percent to $10.1 million. Gaming revenues increased 6.7 percent to $277.2 million, while food and beverage revenues rose 7.5 percent to $17.4 million. The company notes that it faced challenges during the first quarter due to the payroll tax increase and the delays faced by those receiving tax refunds. In May, the Nevada Gaming Control Board approved Pinnacle’s acquisition of Ameristar Casinos (ASCA). However, the Federal Trade Commission ruled the deal would reduce competition in St. Louis, Missouri and Lake Charles, Louisiana, which violates United States antitrust laws. The acquisition is now on hold until a hearing with an administrative law judge in October.
  • Ameristar Casinos (ASCA): Ameristar Casinos reported net revenues of $295.1 million during the first quarter of 2013, down 5.5 percent from a year ago, attributable to declines in all four of its major revenue sources. Casino revenues witnessed the greatest annual decline, falling 4.9 percent to $304.0 million. Room revenues followed, falling 2.6 percent to $18.8 million. In addition, other revenues fell 1.4 percent to $6.8 million, while food and beverage revenues declined 0.4 percent to $34.5 million. Adjusted EBITDA was $89.7 million for the quarter, down 12.1 percent from a year ago. In Jackpot, Nevada, net revenues fell 12.0 percent to $13.0 million. Adjusted EBITDA was $3.6 million, representing a 23.0-percent decline when compared to the same quarter a year ago. The company notes that its performance during the first quarter was negatively affected by adverse weather conditions at a number of its properties, higher payroll taxes and the rise in fuel and utility costs.
  • WMS Industries (WMS): Net revenues for WMS increased 1.1 percent year-over-year in the company’s fiscal third quarter of 2013 to $177.9 million. The latest performance is attributable to a 21.9-percent increase in gaming operations revenues, which was partially offset by an 11.2-percent decline in product sales revenues. Gaming operations revenues were $79.7 million in the first quarter, up from $65.4 million a year ago. The latest period represents the third consecutive quarter in which gaming operations revenues have reported year-over-year growth. At period end, the installed base of participation units increased 3.1 percent to 9,684, which is the highest quarter-end installed base witnessed in seven quarters. Average installed participation units increased 2.2 percent to 9,319, while average daily revenue per participation unit increased 0.9 percent to $68.65. Product sales revenues fell from $110.6 million to $98.2 million during the quarter. The average sales price per new unit reported little change year-over-year, increasing a modest 0.7 percent to $15,344. In addition, total unit shipments fell 12.9 percent to 6,323. The latest performance is attributable to a 21.3-percent decline in new unit shipments to the U.S. and Canada and a 16.3-percent decline in used unit shipments. New unit shipments to International markets increased 17.8 percent to 1,644.
  • SHFL Entertainment (SHFL): SHFL Entertainment reported net revenues of $77.4 million in the company’s fiscal second quarter of 2013, up 17.2 percent compared to a year ago. Revenue from product leases and royalties increased 8.5 percent to $29.2 million, while revenues from sales and services increased 23.2 percent to $48.2 million. Adjusted EBITDA increased 7.0 percent to $25.4 million. The latest revenue growth is attributable to strong performances in the Utility, Proprietary Table Games (“PTG”) and Electronic Gaming Machine (“EGM”) sectors. Utility revenues were $30.5 million, up 22.1 percent from a year ago, primarily due to sales of the MD3 shuffler in Asia. PTG revenues increased 17.8 percent to $14.0 million, due to increased leases and sales revenues. Progressive units installed increased 12 percent annually to 1,245. EGM revenues were $25.7 million, representing a 15.7-percent increase from a year ago. The latest performance is attributable to strong sales in Australia and Asia. EGM units sold increased 14.2 percent to 1,192. Electronic Table Systems (“ETS”) revenues also increased in the second quarter, rising 3.6 percent to $7.1 million.

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May 2013

Regional Operators Post Big Stock Gains

Gaming stocks pressed forward in April 2013 as first quarter earnings season commenced and broader equity market improvements contributed to the rise. The Applied Analysis Gaming Index (AAGI) increased 14.71 points (+3.2 percent) to a composite value of 473.61 during April. The gains were largely sourced to the stock performances of the gaming operator component of the index as gaming equipment manufacturers posted softer stock price performances on a month-to-month basis. Compared to the prior year, the AAGI remains down 4.8 percent while the S&P 500 is up 13.3 percent (when computed on a similar basis). The biggest gains were reported by regional operators Boyd Gaming (BYD) and Pinnacle Entertainment (PNK). Boyd posted a 23.91-percent jump in its average daily stock price from March to April, and we expect our May report to reflect similar improvements due to a late-month rally; the stock was trading at $12.00 per share as of the close of April. Pinnacle Entertainment (PNK) posted a 16.83-percent rise in its average daily stock price, with analyst upgrades contributing to the gain. Pinnacle is in the process of acquiring regional operator Ameristar Casinos (ASCA) for $2.8 billion, which results in a cash purchase price of $26.50 per share. The stockholders of ASCA approved the acquisition during a special meeting. Selected earnings reports during the past month included the following:

  • Penn National (PENN): Penn National reported net revenues of $798.2 million in the first quarter of 2013, up 8.4 percent compared to the same quarter a year ago. Adjusted EBITDA increased 10.0 percent year-over-year to $220.7 million. Both of the major revenue sources for the company reported increases during the quarter. Gaming revenues reached $717.9 million, up 9.4 percent from a year ago, while food, beverage and other revenues increased 7.9 percent to $121.9 million. Despite overall revenue and EBITDA growth, the East/West segment, which includes M Resort, reported dramatic declines in net revenues and adjusted EBITDA. Net revenues for the region were $317.0 million in the first quarter, down 14.5 percent from a year ago. Adjusted EBITDA fell 12.7 percent to $92.5 million.
  • Boyd Gaming (BYD): Net revenues for Boyd Gaming were $737.0 million during the first quarter of 2013, up 16.4 percent from the first quarter of 2012. Adjusted EBITDA increased 22.2 percent to $163.5 million. In Las Vegas, the Locals’ Market reported net revenues of $152.8 million, down 1.3 percent compared to the same period a year ago. Adjusted EBITDA reported a year-over-year increase for the first time in over a year, rising 1.9 percent to $39.2 million. The company notes that the market’s latest performance was attributable to new slot and marketing initiatives as well as a focus on operating margins. In addition, the company witnessed strong visitation to its properties as a result of the West Coast Conference basketball championship at the Orleans Arena and its sponsorship of the Las Vegas NASCAR race in March. Downtown Las Vegas reported weaker results during the first quarter. Net revenues were $54.1 million, down 5.1 percent from a year ago. Meanwhile, adjusted EBITDA declined 15.7 percent to $7.1 million. Although the market witnessed improvements in March, it was not enough to offset the weak business levels reported at the beginning of the quarter.
  • Bally Technologies (BYI): Bally Technologies reported net revenues of $259.1 million during the company’s fiscal third quarter of 2013, up 13.3 percent from the prior year period. Adjusted EBITDA was $85.0 million, up 14.2 percent from last year. Each of the major sources of revenue reported year-over-year increases during the period. Gaming equipment revenues increased 8.2 percent to $85.8 million, due to an increase in domestic replacement sales. The average selling price of new gaming devices declined 6.0 percent to $16,051 during the quarter, but new-unit sales increased 18.7 percent to 4,923. Gaming operations revenues increased 10.3 percent year-over-year to $102.0 million as a result of a 73-percent increase in the installed base of WAP games. Meanwhile, systems revenues reported the greatest year-over-year increase, rising 25.5 percent to $71.3 million, partially attributable to a 17.0-percent increase in maintenance revenues. Bally Technologies recently announced a $300 million share repurchase program, while the latest quarter represented the 22nd quarter in a row in which the company has repurchased stock. Since November 2007, Bally Technologies has repurchased approximately $1 billion of its common stock.
  • Wynn Resorts, Ltd. (WYNN): Wynn Resorts reported net revenues of $1.4 billion during the first quarter of 2013, up 5.0 percent from a year ago. Adjusted EBITDA increased 15.5 percent to $451.1 million. The company attributes the latest performance to a 4.4-percent revenue increase in Macau and a 6.6-percent increase in Las Vegas. Wynn’s Las Vegas properties reported net revenues of $386.6 million during the period, up 6.6 percent when compared to the same quarter a year ago, while adjusted EBITDA increased 19.3 percent to $120.4 million. EBITDA margin was 31.1 percent, up 3.3 percentage points from last year. Gaming revenues in Las Vegas increased 11.8 percent year-over-year to $176.3 million, partially attributable to a win percentage of 26.7 percent, which is above the company’s expected range of 21 percent to 24 percent. Non-gaming revenues were $256.4 million, up 1.6 percent from last year, due to increases in hotel and food and beverage revenues. Hotel revenues increased 4.8 percent to $91.5 million during the quarter, primarily attributable to a 1.4-percent increase in average daily room rate (“ADR”) to $258 and a 3.6-percentage point increase in occupancy rate to 82.9 percent. Meanwhile, food and beverage revenues increased 6.0 percent to $115.4 million due to strong performances in the company’s restaurants, night clubs and beach clubs. Non-gaming revenue growth was partially offset by a decline in entertainment revenue, which fell 28.3 percent due to a show that ended its run at the Encore theatre.
  • International Game Technology (IGT): Net revenues for International Game Technology (IGT) were $600.0 million during the company’s fiscal second quarter of 2013, up 10.9 percent compared to the second quarter of 2012. Although gaming operations revenues reported a year-over-year decline during the period, strong increases in product sales and interactive revenues drove overall growth. Gaming operations revenues were $254.3 million during the second quarter, down 4.4 percent from last year, due to 5.5-percent decline in revenues in North America. The installed base increased 1.1 percent to 56,700, attributable to a 5.2-percent increase in the International installed base. Product sales revenues increased 15.9 percent to $279.0 million as a result of a 24.8-percent increase in revenues in North America. Units shipped increased 36.2 percent to 14,300, largely attributable to a 58.8-percent increase in North American new units and a 68.0-percent increase in North American replacement units. Average machine selling price declined 10.8 percent to $14,100, primarily due to increased promotional activity. Social gaming revenues increased 31.0 percent quarter-to-quarter to $54.3 million, driven by increases in average daily active users (DAU) and average bookings per DAU.

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April 2013

Mixed Results Leave Gaming Index Relatively Flat in March

The gaming sector generally held its ground in March 2013 as aggregate valuations remained on par with where they stood in February. The Applied Analysis Gaming Index (AAGI) posted a composite score of 458.90 at month’s end, which was a modest 0.2 percent ahead of the preceding period. Compared to the same period of the prior year, the gaming sector remains off 6.2 percent. The broader equities markets posted positive performances during the month, with the S&P 500 edging up another 2.5 percent (when computed on a similar basis to the AAGI). Compared to the prior year, the broader market is up 11.6 percent. The biggest gainer of the month was Caesars Entertainment (CZR), likely benefiting from the February internet-based gaming approvals in Nevada and New Jersey. Performances in Macau, China are also likely contributing to the increased interested in the gaming giant. Boyd Gaming (BYD) also posted respectable gains (+7.3 percent) as the geographically diverse operator announced the sale of its land holdings on the Las Vegas Strip. Penn National Gaming (PENN) also posted a positive stock performance, potentially benefitting from its pending conversion into a real estate holding company and operator entity. Key events and earnings reports during the past month included the following:

  • Boyd Gaming (BYD) Disposes of Former Echelon Project – Following a February announcement regarding the sale of its Dania Jai-Alai disposition for $65.5 million, Boyd Gaming announced the sale of the company’s land holdings on the Las Vegas Strip. The company previously commenced construction on the Echelon project on the northern end of the Strip before suspending construction activity due to shifts in the economic climate and tourism industry. The 87-acre site (and existing improvements) have been sold to Genting Group for an estimated purchase price of $350 million, or just over $4.0 million per acre. Boyd received an estimated $157 million in net proceeds from the transaction following required payments for utility infrastructure and closing costs. The sale resulted in a one-time, non-cash pre-tax impairment charge of approximately $994 million during the fourth quarter of 2012. It is worth noting that with the sale, Boyd is able to avoid approximately $16 million in annual costs associated with the suspended project. Genting has already announced plans to develop a resort property that utilizes much of what already exists on the site. The proposed “Resorts World Las Vegas” is expected to have a price tag ranging from $2 billion to $7 billion. The sale and building plans are a signal of renewed interest in the Las Vegas resort industry.
  • Boyd Gaming (BYD) Releases Fourth Quarter Earnings Report – Concurrent with the announcement regarding the Echelon sale, Boyd Gaming reported net revenues of $625.8 million during the fourth quarter of 2012, up 3.2 percent from the same period a year ago. Adjusted EBITDA was $100.9 million, down 11.7 percent compared to last year. Gaming revenues reported a year-over-year increase in the fourth quarter, rising 4.9 percent to $542.4 million. However, food and beverage and room revenues each reported declines, down 2.8 percent and 7.8 percent, respectively. Company-wide results reflect the addition of the operations of Peninsula Gaming, LLC, which was acquired on November 20, 2012. In Las Vegas, the locals market reported a 2.6-percent year-over-year decline in net revenue to $148.7 million, while adjusted EBITDA fell 14.4 percent to $31.5 million. Despite negative growth for the quarter, the company notes that the market showed improvement near the end of the period, due to an expansion of low-denomination slots. The Downtown Las Vegas properties reported net revenue of $57.7 million during the fourth quarter of 2012, down 1.7 percent from the fourth quarter of 2011. Adjusted EBITDA fell 8.3 percent to $9.9 million. The latest performance is primarily attributable to reductions in the weekly flight schedule for the company’s Hawaiian charter service.
  • SHFL Posts Fiscal First Quarter Results – SHFL Entertainment reported net revenues of $58.8 million during its fiscal first quarter of 2013, up 4.9 percent from the same period a year ago. The growth is partially attributable to gains in utility and proprietary table games (PTG) revenues. Utility revenues increased 28.9 percent to $25.3 million, while PTG revenues increased 12.3 percent to $12.8 million. MD3 units installed increased from 695 to 2,214 year-over-year, and the progressive units installed increased 21.7 percent to 1,228. Despite the increases in utility and PTG revenues, electronic table systems and electronic gaming machines revenues declined during the first quarter. Electronic table systems revenues was $7.1 million, down 14.0 percent, while electronic gaming machines revenues declined 8.1 percent to $13.3 million. Adjusted EBITDA also declined during the period, falling 2.1 percent to $17.9 million.

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March 2013

Internet Gaming Approvals Impact Stocks

Gaming stocks were somewhat mixed during February as additional earnings reports shed more light on the sector and two states approved legislation authorizing interactive gaming. In Nevada, the state legislature approved Assembly Bill No. 114 (AB 114) on February 21, 2013 allowing the state to enter into pacts with other states to offer internet-based poker, among other items. On February 27, 2013, the state of New Jersey’s governor signed legislation that also authorized on-line poker. While there are still a number of regulatory and logistical issues to be addressed, it is clear the industry is well positioned to take advantage of increased technological capabilities of this emerging sector.

The gaming manufacturer component of the Applied Analysis Gaming Index (AAGI) posted positive gains with all four companies witnessing stock price improvements month-to-month. The gains were offset by the aggregate performance of gaming operators. The biggest gainers during the month included Caesars Entertainment (CZR) and WMS Industries (WMS). The AAGI declined a modest 2.31 points (-0.5 percent) overall to a composite score of 457.78. The broader market (S&P 500) was up 2.2 percent on the month. On an annual basis, the AAGI matches where it stood one year ago, and the S&P 500 is higher by 11.8 percent.

Key events and earnings reports during the past month included the following:

  • Boyd Gaming (BYD) Sells Florida Investment – While Boyd Gaming (BYD) has yet to announce its year-end results, the gaming operator announced it is selling Dania Jai-Alai for $65.5 million to Dania Entertainment LLC. The company expects to use the proceeds from the sale for general corporate purposes, including possible pay downs on its debt. Boyd also appears well positioned with gaming licenses in the two states to recently approve internet-based gaming. Official earnings results for the fourth quarter will be released on March 4, 2013.
  • Ameristar Casinos (ASCA) Releases Year-End Results – Ameristar reported net revenues of $288.8 million during the fourth quarter of 2012, down 2.5 percent from a year ago. Adjusted EBITDA declined 4.6 percent to $80.4 million, while EBITDA margin fell 0.6 percentage points to 27.8 percent. Casino revenues declined 2.1 percent to $298.5 million, while food and beverage and room revenues reported increases of 5.8 percent and 1.6 percent, respectively. The St. Charles property was the only one to report year-over-year increases in net revenues (+0.4 percent), adjusted EBITDA (+0.9 percent) and EBITDA margin (+0.1 percentage point). Ameristar’s properties in Jackpot, Nevada reported a 5.8-percent decline in net revenues to $13.5 million, due to lower-than-expected slot hold. Adjusted EBITDA fell 5.5 percent to $3.9 million, while EBITDA margin increased 0.1 percentage point to 28.8 percent. In December, it was announced that Pinnacle Entertainment would acquire Ameristar Casinos for $869 million.
  • Caesars Entertainment (CZR) Posts Q4 Results – Net revenues for Caesars Entertainment declined 4.3 percent during the fourth quarter of 2012 to $2.0 billion, while property EBITDA fell 8.3 percent to $451.9 million. The company notes that the declines were primarily due to property closures in Atlantic City as a result of Hurricane Sandy. Trips declined by 10.9 percent, but the company reported a 6.2-percent increase in spend per trip due to an 11.1-percent increase in the Las Vegas region. In Las Vegas, net revenues declined 3.2 percent to $742.6 million, while property EBITDA fell 3.4 percent to $216.7 million. Net revenues and property EBITDA in the region were negatively affected by Project Linq construction activities, including the closure of O’Shea’s casino and a number of retail stores at Harrah’s Las Vegas as well as renovations at the Quad Resort and Casino. Although trips to the region declined 3.0 percent, spend per trip increased 11.1 percent due to the international high-end segment. However, average daily rate (“ADR”) declined 4.4 percent to $87, while the occupancy rate fell 1.0 percentage point as a result of a decline in group business. Notably, during the quarter, Caesars Entertainment secured $185.0 million in financing to fund the renovation of Bill’s Gamblin’ Hall & Saloon. Renovations began at the beginning of February 2013 with completion expected by the end of the year.

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February 2013

Gaming Stock Surge in January 2013

Stock prices for gaming operators and equipment manufacturers started the year in positive territory as every company in the Applied Analysis Gaming Index (AAGI) posted positive stock gains during January 2013. A recent acquisition and investor anticipation of the quarterly earnings season drove valuations higher during the month. The AAGI also continued to climb as stock price gains for Las Vegas Sands (LVS) accounted for the lion’s share of the uptick due to the company’s rise in stock price combined with its relatively large market capitalization and weighting within the index. Wynn Resorts, Ltd. (WYNN) also contributed positively to the index. During the month of January 2013, the AAGI reached a composite value of 460.08, which represented a 7.9-percent jump from December 2012. On a year-over-year basis, the index was up a more modest 4.9 percent. For comparative purposes, the broader equity markets have outperformed the AAGI on an annual basis, but lagged the sector during the past month. The S&P 500 experienced a 4.1 percent increase from December 2012, yet it remains up 13.8 percent year-over-year (when computed on a similar basis to the AAGI). Key events and earnings reports during the past month included the following:

  • Ameristar Casinos’ (ASCA) Stock Price Remains Elevated – While reported last month, Pinnacle Entertainment’s (PNK) proposed acquisition of Ameristar Casinos (ASCA) drove valuations higher for Ameristar during January, now reflecting a full month of trading (the deal was previously announced on December 20, 2012). The transaction established a purchase price of $26.50 per share; the stock has been trading within a relatively tight range through January and at a slight premium to the pending acquisition price. The premium driven by investor demand may be sourced to speculation that another bidder may emerge for the regional gaming operator. Ameristar also announced a change in their fourth quarter earnings release date (scheduled sometime during the week of February 4th), and they will not host a conference call to discuss the results. The buyer of Ameristar, Pinnacle Entertainment, will be releasing its year-end results on February 13th prior to the markets’ opening.
  • WMS Industries (WMS) To Be Acquired by Scientific Games Corporation (SGMS) – Announced on the last day of the month, WMS agreed to be acquired by Scientific Games for $26.00 per share in an all-cash deal. The valuation equates to approximately $1.5 billion. Both companies received board approval for the the transaction. Scientific Games supplies lottery instant tickets, lottery and video gaming systems and server-based gaming. The deal values WMS at approximately 6.0x its trailing 12-month adjusted EBITDA of $246 million (September 30, 2012). Typical shareholder and regulatory approvals are required before the transaction is consummated; it is expected to close by the end of 2013.
  • Las Vegas Sands (LVS) Fourth Quarter Earnings Strong Abroad – Net revenues for Las Vegas Sands increased 20.9 percent during the fourth quarter of 2012 to a record $3.1 billion, while adjusted property EBITDA increased a more modest 4.4 percent to $1.0 billion. The company notes that it reported record results in Macao with a 43.3-percent increase in adjusted EBITDA to $622.2 million. However, overall, adjusted EBITDA was negatively impacted by a lower table games hold. In Las Vegas, net revenues declined 9.2 percent year-over-year to $308.3 million, due to a 25.7-percent decline in casino revenues and a 12.2-percent decline in food and beverage revenues. Adjusted EBITDA fell 34.7 percent to $52.8 million, while EBITDA margin declined 6.7 percentage points to 17.1 percent. The company notes that the region’s results were negatively affected by lower-than-expected table games win. Convention, retail and other revenues reported a 3.6-percent increase during the quarter to $74.5 million, while room revenues increased 3.3 percent to $114.3 million. The increase in room revenues is attributable to a 1.7-percent increase in revenue per available room (“RevPAR”) as a result of a 4.1-percent increase in average daily rate (“ADR”) to $203, which was partially offset by a 1.5-percentage point decline in occupancy to 87.6 percent. In addition to the recent earnings report, media speculation has suggested that the company is seeking to divest themselves of their assets in Bethlehem, Pennsylvania. The casino property may be worth as much as $1 billion, assuming a number of factors and conditions.
  • Penn National Gaming (PENN) Releases Q4 Results – Overall, earnings fell short of expectations. Penn National reported a 9.9-percent increase in net revenues to $743.8 million during the fourth quarter of 2012. Adjusted EBITDA declined 2.7 percent to $152.3 million. The company notes that the fourth quarter performance was weaker than expected due to newer facilities taking longer than expected to ramp up and a softening of gaming revenue trends industry-wide. The greatest increase was reported in casino revenues, which were $665.8 million in the fourth quarter, up 10.9 percent from the same period a year ago. Food, beverage and other revenue reported a more modest increase, rising just 1.2 percent to $112.2 million. The East/West region, which includes M Resort in Las Vegas, reported net revenues of $301.7 million, down 9.5 percent from a year ago. Adjusted EBITDA was $84.4 million (down 0.1 percent).
  • International Game Technology (IGT) Posts Fiscal First Quarter Results – International Game Technology reported net revenues of $530.3 million in the company’s fiscal first quarter of 2013, up 19.0 percent from the same period a year ago. The company notes that this revenue growth was primarily attributable to growth in North America product sales and its interactive segment. Product sales revenue increased 29.8 percent to $234.8 million, with revenue in North America reporting a 54.3-percent increase to $158.9 million. The number of units recognized increased 46.6 percent to 10,700; however, average machine sales price declined 6.9 percent to $14,800, which the company attributes to negative pricing mix due to VLT sales. Compared to the prior quarter, social gaming revenues increased 15.4 percent to $41.3 million, due to a 3.3-percent increase in daily active users to 1.5 million. Gaming operations reported a decline in revenue, falling 3.7 percent to $242.6 million. Meanwhile, the installed base increased 2.2 percent to 56,800, due to lease operations growth.
  • Wynn Resorts (WYNN) Posts Year-end Results – Net revenues for Wynn Resorts were $1.3 billion during the fourth quarter of 2012, representing a 4.1-percent decline from the same period a year ago. Adjusted EBITDA was $398.5 million, down 0.9 percent from a year ago. The declines reported in the fourth quarter are attributable to results in Macau, where revenue declined 9.7 percent and adjusted EBITDA fell 9.5 percent. The company’s Las Vegas properties reported net revenues of $390.4 million during the period, up 12.1 percent from last year, while adjusted EBITDA increased 29.4 percent to $115.3 million. EBITDA margin increased 3.9 percentage points to 29.5 percent. Casino revenues reported the most significant gain during the quarter, rising 23.8 percent to $180.5 million. Table games drop, slot machine handle and net slot win all reported year-over-year increases, and table games win percentage was 26.8 percent, which is higher than the expected range of 21 percent to 24 percent. Non-casino revenue increased 4.6 percent due to increases in all sources but retail, which declined by just 0.9 percent. Food and beverage revenues increased 7.6 percent to $111.1 million, while entertainment revenues were up 1.6 percent from a year ago due to strong revenues from Le Rêve. Room revenues increased 2.9 percent to $87.8 million due to a 1.6-percent increase in ADR and essentially no change in occupancy rate, which resulted in a 1.8-percent increase in RevPAR to $201.
  • Bally Technologies (BYI) Release Second Quarter Fiscal Results – Bally Technologies reported record diluted earnings per share and net revenues during its fiscal second quarter of 2013. Net revenues increased 13.3 percent to $238.3 million, with increases in all three of the company’s revenue sources. The gaming equipment segment reported the greatest increase in revenue, rising 17.7 percent to $82.6 million due to higher domestic replacement sales. New gaming devices increased 25.6 percent to 4,565, but new unit average selling price declined 3.8 percent to $16,553. Gaming operations revenues increased 14.8 percent to $99.0 million, due to an 87.0-percent increase in the installed base of WAP games. Meanwhile, systems revenues reported a more modest 5.0-percent increase to $56.7 million, with maintenance revenues increasing 27.8 percent to a record $23.0 million. The company notes that traditional domestic replacement sales were up year-over-year for the seventh quarter in a row, and it has also repurchased stock in 21 consecutive quarters.

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January 2013

Gaming sector stocks close out the year on a positive note

Gaming sector stocks closed out the year on a positive note. The Applied Analysis Gaming Index (AAGI) posted a 6.01-point increase during December 2012 to reach a composite score of 426.53. While the increase represented a 1.4-percent rise from November, the gain resulted in a composite score that was essentially flat with the same month of the prior year (-0.1 percent). Compared to the broader market (S&P 500), the gaming sector struggled to keep pace. The S&P 500 was up 2.0 percent month-over-month, but remains up a more robust 14.4 percent on a year-over-year basis (when computed on a comparable basis to the AAGI). During December, all eight gaming operators included in the AAGI reported month-to-month increases in daily average stock prices between November and December. The biggest gainers included Caesars Entertainment (+35.54 percent), Ameristar Casinos (22.37 percent) and Boyd Gaming (17.69 percent). Compared to the December of the prior year, all gaming operators posted stock price increases with the exception of Boyd Gaming (BYD). Regional operators were the biggest gainers during the past 12 months, including Pinnacle Entertainment (+41.13 percent), Penn National Gaming (+33.47 percent) and Ameristar Casinos (+26.72 percent). All gaming equipment manufacturers also posted stock price gains month-to-month, barring Bally Technologies (BYI). However, Bally Technologies (BYI) posted the largest annual gain (+20.01 percent).

Key events during the past month included the following:

  • Ameristar Casinos (ASCA) Agrees to be Acquired by Pinnacle Entertainment (PNK) – On December 20, 2012, Pinnacle Entertainment (PNK) announced that it will acquire Ameristar Casinos (ASCA) in a transaction that values the company at approximately $2.8 billion. The deal is an all cash transaction that will have PNK assume the debt of ASCA and pay ASCA shareholders an amount equal to $26.50 per share. The price point reflected a 20-percent premium to pre-announcement closing price. The agreement provides for break-up fees in the event the deal is cancelled (the PNK penalty is $85 million and the ASCA cancellation fee is $38 million). The termination fees may be a key factor in the event the buyer cannot perform. However, more importantly, should another bidder for the company enter the process, the fees could come into play.
  • Fiscal Cliff Discussions Continue – While there has been no material movement on the Fiscal Cliff issue through the majority of the month of December, investors generally believe there is some compromise likely to happen in advance of substantial Federal revenue enhancements and sequestration measures. Uncertainty remained a dark cloud on equities, including gaming companies, but the overall impact appears to be modest throughout the month. Some gamers have taken preemptive action on the dividend front by issuing special dividends in December to avoid potentially higher tax rates starting in 2013. These latest moves likely helped boost values as the principal shareholders of Wynn Resorts (WYNN) and Las Vegas Sands (LVS) looked to benefit in 2012.
  • MGM Resorts’ Subsidiary Sells Condos at CityCenter in Bulk – CityCenter, a 67-acre urban resort and residential development, sold 427 residential units for $119 million at Veer Towers. The transaction is estimated to reflect an average sales price per square foot of $300. While the price point is below previous new construction asking prices for the project, the sale reflects a premium to other high-rise residential products in the market. CityCenter retained control of 11 penthouse units that it intends to sell. The company also intends to focus its sales efforts on the remaining inventory at the premium-priced Mandarin Oriental project within the CityCenter campus. The units are housed on the upper half of the 47-story tower that carries the “Residences at Mandarin Oriental“ flag. It is also worth noting that MGM Resorts International (MGM) recently completed a multi-billion dollar debt refinancing transaction that has put the company on more solid footing from a balance sheet perspective.
  • SHFL Entertainment (SHFL) Announces Fiscal Fourth Quarter Results – The gaming equipment maker posted fourth quarter revenue growth of 12 percent while SHFL’s adjusted EBITDA rose 6 percent to $23.9 million. For the fiscal year, the company posted revenue growth of 14 percent to $259.0 million, an all-time high, while adjusted EBITDA for the year was $87.0 million (+17 percent).

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December 2012

Fiscal Cliff Concerns and Third Quarter Earnings Impact Gaming Sector

With the recent presidential election behind us and heightened attention on the looming fiscal cliff, stocks have experienced increased volatility, particularly within the gaming sector. In addition to external forces, a number of gaming companies posted third quarter earnings reports during November, which were mixed, similar to those released in October. Moves by a few gaming companies to avert potentially higher dividend income taxes in 2013 have pushed special dividends before the close of 2012. Las Vegas Sands (LVS) made a big move with a special dividend of $2.75 per share, for an estimated distribution to the majority shareholder of approximately $1.2 billion. Wynn Resorts, Ltd. (WYNN) also announced a special dividend of $7.50 per share. Also during the month, Penn National (PENN) announced plans to split the company into a real estate investment trust and an operating company structure. While the concept is not new, the companys stock responded positively. Others are likely to evaluate a similar potential deal structure. By the close of November, the Applied Analysis Gaming Index (AAGI) posted a decline of 2.4 percent (10.3 points) to a composite score of 420.52. The decline was slightly more modest than the broader markets (S&P 500 dipped 3.0 percent month-to-month). On an annual basis the gaming sector remains off 8.1 percent.

A number of third quarter earnings reports were released during the month of November 2012. Selected performances are included below.

  • Las Vegas Sands (LVS) - Las Vegas Sands (LVS) reported a 12.5-percent increase in company-wide net revenue to $2.7 billion in the third quarter, while adjusted EBITDA fell 5.1 percent to $876.9 million. In Las Vegas, net revenues were $364.4 million, up 4.9 percent compared to last year. Adjusted EBITDA also per-formed well, increasing 4.1 percent to $98.2 million. Casino revenues increased 38.0 percent to $171.5 million, due to a higher than expected table games win percentage of 28.1 percent and an increase in table games drop of 8.5 percent. Non-gaming segments did not fare as well, with food and beverage revenue reporting a dramatic 25.9-percent decline to $42.4 million and convention, retail and other revenue falling 6.5 percent to $68.0 million. Room revenue also fell, reporting a 7.3-percent decline to $105.7 million. The performance is attributable to a 5.6-percent decline in RevPAR as a result of no change in ADR and a 5.4- percentage point decline in occupancy rate to 87.3 percent. The company noted that it continues to report strong growth in play from Asian visitors.
  • Boyd Gaming (BYD) - Net revenues for Boyd Gaming (BYD) were $613.3 million for the third quarter of 2012, up 3.9 percent compared to the same quarter last year. Adjusted EBITDA declined 15.1 percent to $103.6 million. The Las Vegas Locals segment witnessed a 4.9- percent decline in net revenues during the period, falling from $145.9 million to $138.8 million. The segment also reported a dramatic decline in adjusted EBITDA, which fell 21.2 percent to $24.3 million. The latest performance in the market is primarily attributable to less business from the casual players market. The company notes that it is making an effort to attract more business from these customers, including installing 1,500 new penny denomination games throughout its southern Nevada properties. These games continue to prove most popular with the casual players and are one of the few segments in the Locals market to report growth in recent months. Downtown Las Vegas reported net revenues of $53.5 million in the third quarter, up a modest 0.4 percent from last year. Adjusted EBITDA increased 5.8 percent to $6.4 million. The company attributes the growth to effective marketing campaigns to its Hawaiian customers. In addition, revenues per seat from the Hawaiian charter service have increased 12 percent.
  • International Game Technology - International Game Technology (IGT) reported a 17.0-percent increase in net revenue to $631.1 million during the companys fiscal fourth quarter of 2012. For the year, revenues were $2.2 billion, up 9.9 percent compared to fiscal year 2011. Gaming operations revenue (excluding Interactive) fell 2.2 percent to $263.8 million, while the installed base increased 5.9 percent to 57,100, due to global lease operations growth. Product sales revenue increased 22.0 percent to $313.4 million, due to increased North American replacement sales, which were up 66.7 percent to 8,500. Average machine sales price declined 1.3 percent to $15,000, primarily attributable to a 6.5-percent decline in International average selling price. However, the average selling price of a machine in North America increased 3.5 percent to $14,700.

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November 2012

Gaming sector continues to press forward

The gaming sector continued to press forward in October 2012 as the Applied Analysis Gaming Index (AAGI) edged up 2.5 percent, or 10.5 points, to reach a composite score of 430.8 points. The AAGI has posted three consecutive monthly increases following three monthly declines during the summer months. Compared to the same month of the prior year, gaming stocks remain down 8.5 percent in aggregate. The sector's annual performance moved in an opposite direction compared to the broader equities market (S&P 500), which trended up 19.1 percent during the past 12 months. However, gaming stocks appear to be making up ground as the S&P 500 slid 0.4 percent from September 2012 (when computed on a similar basis to the AAGI). The recent increase in the overall index was primarily sourced to improved investor demand for Wynn Resorts, Ltd. (WYNN), which witnessed an average stock price increase of 5.16 percent during the month. The latest increase came on the heels of a third-quarter financial report that exceeded expectations, particularly in Las Vegas. At the same time, the global gaming company announced a special cash dividend of $7.50 per share and that it intends to increase (double) the regular quarterly dividend to $1.00 per share, yielding $4.00 per share per year. Investors responded positivity to the news.

Stock performances of other gaming operators were mixed during the month as Caesars Entertainment (CZR), Boyd Gaming (BYD) and MGM Resorts International (MGM) posted declines in average daily stock prices during the month. Other regional operators witnessed stock price gains, while Las Vegas Sands (LVS) also edged up. The gaming equipment manufacturer segment of the market also posted mixed results as Bally Technologies (BYI) and International Game Technology (IGT) witnessed stock price gains while SHFL Entertainment (SHFL) and WMS Industries (WMS) posted softer performances. Overall, movements by the gaming operators drove the monthly increase in the AAGI. A number of third quarter earnings reports were released during the month of October 2012. Selected performances are included below.

  • Wynn Resorts, Ltd. (WYNN) - Net revenues for Wynn Resorts in the third quarter of 2012 were relatively flat year-over-year at $1.3 billion, while adjusted EBITDA increased 5.6 percent to $402.6 million, primarily attributable to a stronger performance at Wynn Las Vegas. Net revenues at the company's Las Vegas properties increased 11.8 percent to $388.0 million, while adjusted EBITDA witnessed a dramatic 29.7- percent increase to $110.4 million. Casino revenues were up 22.6 percent year-over-year to $155.6 million, with a table games win percentage of 21.9 percent, which is within the company's expected range. Non-casino revenue also reported an increase, rising 5.3 percent in the third quarter to $280.1 million, primarily attributable to increases in hotel and food and beverage revenues. Hotel revenues increased 1.4 percent to $91.0 million, despite a 1.2-percent decline in revenue per available room ("RevPAR") as a result of a 2.6-percentage point decline in occupancy rate. Due to strength in the nightclub business, food and beverage revenues increased 11.1 percent to $132.6 million.
  • Caesars Entertainment (CZR) - Caesars Entertainment reported net revenues of $2.2 billion during the third quarter of 2012 and adjusted EBITDA of $484.5 million. Compared to the prior year quarter, both net revenues and adjusted EBITDA remained relatively flat, with a reported increase of just 0.4 percent. In Las Vegas, net revenues were $735.1 million. Casino revenues increased compared to the prior year, but a decline in food and beverage and other revenues caused net revenues to remain relatively flat year-to-year. Room revenues were also relatively flat compared to last year, reporting a 2.2-percent decline in average daily room rate and a 1.8-percentage point decline in occupancy rate. The company is continuing construction on Project Linq with the first phases expected to complete in the second half of next year. Tenants for about 70 percent of the planned space were recently announced, including Yard House, Brooklyn Bowl, F.A.M.E. and Tilted Kilt.
  • MGM Resorts International (MGM) - MGM Resorts reported net revenues of $1.5 billion for its wholly owned domestic resorts in the third quarter of 2012, down 2.0 percent when compared to the same quarter a year ago. Adjusted EBITDA fell 7.0 percent to $325 million. Hotel revenues declined 3.0 percent, due to a 2.0-percent decline in RevPAR, which is attributable to no change in average daily room rate and a 3.0- percentage point decline in average occupancy rate. In Las Vegas, MGM Grand and The Mirage reported relatively strong quarterly results. MGM Grand witnessed a 14.6-percent increase in adjusted EBITDA to $48.4 million, despite a 1.4-percent decline in net revenues to $239.7 million. Meanwhile, the Mirage reported a 15.6-percent increase in net revenues to $162.9 million and a 55.5-percent increase in adjusted EBITDA to $39.5 million. Construction on Hakkasan, a new entertainment and dining venue at MGM Grand, continues with completion expected

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October 2012

Major gaming companies continued to gain momentum in September 2012, as the Applied Analysis Gaming Index (AAGI) rose 6.5 percent from the preceding month. The latest sector performance followed an uptick in August, but improvements were not sufficient to offset price declines experienced throughout the summer months. Stock price gains in September were noted for both gaming operators and equipment manufacturers. All but one gaming company, Caesars Entertainment (CZR), posted month-to-month increases.

The largest gainers in the month include Boyd Gaming (BYD) with a 10.88-percent jump in its stock price and Las Vegas Sands (LVS) that increased 10.22 percent. Four of the gaming operators posted increases in the 7-percent range while Ameristar Casinos (ASCA) was up a more modest 2.66 percent. Gaming equipment manufacturers all posted gains, with International Game Technology (IGT) reporting a 9.27-percent increase. Compared to the broader market, the gaming sector made up some ground as the S&P 500 witnessed a 2.8-percent increase on a month-to-month basis compared to 6.5 percent for the gamers. On an annual basis, the AAGI remains down (-18.2 percent), while broader sector stocks are up a healthy 23.0 percent.

Gaming sector stock improvements appear to be fueled more by speculation than a resurgence in fundamentals. Increased investor interest was clear for Las Vegas Sands (LVS), which recently obtained a higher price target by selected analysts and a recommendation to divide the company into multiple asset pools to increase overall valuation. One investor suggested the global gaming company could attract higher valuations as two real estate investment trusts (REITs) - one holding its retail shopping mall assets and the other holding the hotel assets - and a third entity as a pure casino operator.

LVS also announced expansion plans in Macau with a $2.5-billion-plus new casino complex titled The Parisian. The project is expected to incorporate a replica of the Eiffel Tower, and it is currently programmed to include 3,000 hotel rooms. LVS also announced plans to develop an integrated resort in Madrid, Spain. Reports about the project suggest the cost could extend upwards of $20 billion and programming could include 36,000 hotel rooms, six casinos and multiple golf courses.

Gaming equipment manufacturers were also busy during the month of September. Not only were a number of companies authorized to operate Internet-based gaming platforms by Nevada gaming regulators, but some were moving forward with other initiatives. Specifically, Bally Technologies (BYI) announced an agreement with the Ontario Lottery and Gaming Corp. to provide its progressive system technology and slot machines to develop a $1 million wide-area progressive jackpot link. The "Mighty Million" product will be offered on about 90 games at 19 different gaming venues across Ontario.

Also during the month, BYI announced a deal to provide more than 4,000 video gaming terminals (VGTs) to companies operating in the state of Illinois; the units are expected to be deployed over the next two years. The company also struck a deal with American Casino & Entertainment Properties, LLC, the owner and operator of several Nevada casinos including the Stratosphere, to provide its iGaming platform. The platform is an open architecture system that enables operators to select content from various providers; it also provides hosting and offers mobile integration.

International Game Technology (IGT) has also made moves with its emerging technologies. IGT secured its first land-based deal in Nevada by partnering with Hard Rock Hotel and Casino to provide its DoubleDown portfolio of online casino-style games that can be played on the hotel's website. WMS Industries (WMS) has also moved into the online gaming world. The Nevada Gaming Commission approved WMS for an interactive gaming manufacturer license and a service provider license in the State of Nevada. These approvals enable WMS to partner with Nevada casino operators to provide online poker to players.

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September 2012

Mixed Earnings Reports Impact Stocks

Gaming sector stocks generally continued to report sluggish performances during August 2012, barring a select few. Casino operators with substantial investments abroad, particularly Las Vegas Sands (LVS) and Wynn Resorts, Ltd. (WYNN), experienced modest gains during the latest month pressing the Applied Analysis Gaming Index (AAGI) into positive territory. With 6.7- and 10.2-point contributions to the index for Sands and Wynn, respectively, the AAGI increased in valuation from 383.8 in July to 394.6 in August (+2.8 percent). The mid-month rise for Macau-based operators was partially attributable to anecdotal reports of better-than-expected gaming performances in the region and analyst upgrades. Other market movements were sourced to second quarter earnings reports that were released early in the month, several of which included little to no growth in top-line revenues and deteriorating earnings. Additionally, all four manufacturers within the AAGI posted lower values during the month, offsetting gains from the operator component of the index. The gaming sector moved in a similar direction as the broader equities markets; the S&P 500 edged up 3.2 percent during August.

Selected earnings reports released during the month include the following:

  • Caesars Entertainment (CZR) - Total net revenues for Caesars Entertainment increased a modest 0.2 percent to $2.2 billion, while property EBITDA declined 4.3 percent to $518.3 million. The revenue increase was primarily attributable to increased revenues from the company's international properties and online operations, including Playtika, Ltd., which was acquired in May 2011. In Las Vegas, net revenues reported a 0.7-percent decline to $780.7 million. EBITDA declined 8.0 percent to $214.4 million. The company notes that the region's results were negatively impacted by lower casino revenues as a result of a 3.3-percent decline in visitor spend per trip as well as inconveniences resulting from Linq construction activities. Hotel revenues in Las Vegas increased 4.4 percent due to a 2.3-percent increase in visitor trips and additional rooms resulting from the January 2012 opening of Octavius Tower. The company notes that Nobu Tower at Caesars Palace is on track to open by the end of the year. In addition, the foundation plinths for the High Roller observation wheel are complete, and recently, the company was granted the Amusement and Transportation System permit from Clark County, allowing all construction on the wheel to move forward.
  • MGM Resorts International (MGM) - MGM Resorts International reported net revenue of $1.5 billion for its wholly owned domestic resorts, which represents essentially no change when compared to the same quarter in the prior year. Adjusted EBITDA increased 4 percent to $345 million. In Las Vegas, net revenues increased slightly to $1.2 billion (excluding CityCenter), while adjusted EBITDA witnessed a modest 0.5-percent decline to $269.5 million. Among properties, Circus Circus reported the greatest revenue and adjusted EBITDA increase of 7.3 percent and 15.5 percent, respectively, partially attributable to an 11.9-percent increase in RevPAR to $47. ARIA at CityCenter achieved an occupancy rate of 92.7 percent and RevPAR of $187, which are the highest levels for the property since it opened in December 2009. Major changes are coming to some of the company's Las Vegas properties. Recently, MGM Resorts announced a partnership with the Morgans Hotel Group, which will transform THEhotel at Mandalay Bay into the Delano Las Vegas. Room renovations will begin in mid-2013. Room renovations at MGM Grand and Bellagio continue with completions expected in 2013. In addition, construction of Hakkasan, a new dining and entertainment venue at MGM Grand is currently underway, and new Cirque du Soleil shows will be opening at ARIA and Mandalay Bay.
  • Ameristar Casinos (ASCA) - Ameristar Casinos reported net revenues of $296.3 million during the second quarter of 2012, down 2.9 percent compared to the same quarter of the prior year. Adjusted EBITDA fell 4.3 percent year-over-year to $90.2 million. The company notes that its second quarter performance was affected by increased competition, construction disruption and a pull-back in consumer discretionary spending. Net revenues at the company's properties in Jackpot, Nevada declined 10.2 percent to $14.2 million, while adjusted EBITDA fell 25.8 percent to $4.0 million. The latest quarter's weaker performance in the region was primarily attributable to road repaving on Highway 93 between Twin Falls, Idaho and Jackpot as well as a hotel renovation that was not completed until July 2012.
  • Bally Technologies (BYI) - Bally Technologies reported record net revenues of $245.8 million during its fiscal fourth quarter of 2012, up 15 percent when compared to the same period of the prior year. Adjusted EBITDA reached a record $81.8 million, which is a 22-percent increase compared to the prior year period. Gaming equipment revenues reported a 33-percent increase to $96.8 million, attributable to higher unit sales from replacements and new casino openings. Also notable, the average selling price of gaming devices increased 3 percent to $17,182 per unit. Gaming operations revenues also reported a year-over-year increase, rising 14 percent to a record $93.7 million. The company notes that the operation segment's latest performance is primarily attributable to a 72-percent increase in the installed base of WAP games. Other notable results for the fiscal fourth quarter of 2012 include a 15-percent increase in maintenance revenues and a 6-percent decline in systems revenues.
  • WMS Industries (WMS) - WMS reported net revenues of $195.9 million during the company's fiscal fourth quarter of 2012, down 3.6 percent compared to the same period a year ago. Despite the year-over-year decline, the period represents the third consecutive quarter of sequential revenue growth for the company. Product sales revenues increased 1.9 percent year-over-year to $133.1 million. However, the number of new units on which revenue was recognized and the average selling price per new unit declined 5.6 percent and 5.7 percent, respectively. Gaming operations revenues declined a dramatic 13.5 percent to $62.8 million, partially attributable to a 3.1-percent decline in total installed participation units. Also notable, during the fourth quarter of 2012, WMS entered into an agreement to launch My Poker video poker games by the end of the year at Station Casinos' properties in Las Vegas.

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August 2012

Gaming Stocks Continue to Struggle

During the month of July 2012, gaming sector stock performances were less than positive. All eight gaming operators comprising that segment of the Applied Analysis Gaming Index (AAGI) posted month-to-month declines in their valuation. Lackluster second quarter earnings reports released late in the month and continued economic concerns have investors backing away from the gaming sector. An economic slowdown in key Asian markets remains concerning for investors in both casino and equipment manufacturing companies. Volatility in the high-end gaming market in Las Vegas also produced somewhat unexpected results, which has put a spotlight on the sector. The AAGI reached a composite score of 383.80 points by month-end (-4.9 percent), which included the mixed results of gaming equipment manufacturers as two edged north and two retreated. With three consecutive months of overall declines, the index contracted to levels last reported nearly two years ago. On a year-over-year basis, the AAGI shed 27.7 percent of its valuation. Conversely, the broader markets edged up; the S&P 500 (when computed on a similar basis) was up 2.7 percent from June 2012 and up 2.6 percent from July 2011. Selected earnings reports released during the month include the following:

  • Wynn Resorts, Ltd. (WYNN) - Net revenues for Wynn Resorts declined 8.3 percent to $1.2 billion, attributable to a decrease in revenues in both Macau and Las Vegas. Adjusted EBITDA was $384.1 million during the second quarter, down 14.1 percent compared to the same quarter in 2011. In Las Vegas, net revenues declined 11.6 percent to $345.6 million, while adjusted EBITDA fell 38.3 percent to $81.9 million. Casino revenues declined a dramatic 37.7 percent during the quarter to $98.6 million, with the company citing significantly lower than expected hold (15.0 percent on table games compared to 27.6 percent in the 2011 quarter). Meanwhile, non-gaming revenue increased 5.5 percent during the quarter to $290.7 million. Food and beverage revenues increased 9.8 percent to $138.4 million, due primarily to strong performances in the company's nightclub segment. Room revenue increased 5.6 percent to $96.2 million, attributable to a 3.8-percent increase in revenue per available room (RevPAR) to $222. Although occupancy declined 1.6 points to 87.6 percent, average daily room rate (ADR) increased 5.6 percent to $254. Notably, all rooms were available for rent during the quarter; in the prior year quarter, 1.7 percent of rooms were out of rotation due to renovations.
  • Boyd Gaming (BYD) - Boyd Gaming reported net revenues of $615.2 million for the second quarter of 2012, up 7.1 percent from the same period a year ago. Adjusted EBITDA declined 3.9 percent during the quarter to $113.8 million. The company notes that the revenue growth was attributable to strong performances in the Midwest and South regions, while EBITDA declined due to weaker performance in Nevada. Net revenues in the Las Vegas Locals market declined 1.9 percent during the second quarter of 2012 to $149.0 million, while adjusted EBITDA fell 10.5 percent to $34.5 million. The company notes that the weaker performance during the quarter was attributable to lower hold in sports books throughout its properties, higher expenses associated with employee benefits and declines in casual gaming customers. The downtown market reported net revenues of $55.9 million, down 1.1 percent compared to a year ago. Adjusted EBITDA fell 13.4 percent to $8.1 million. The company reported that business volumes were impacted due to changes in marketing efforts targeting the downtown segment's core Hawaiian customers. However, the company believes the segment will recover in the third quarter from what it believes are temporary impacts resulting from these changes.
  • Penn National Gaming (PENN) - Penn National reported net revenues of $712.6 million during the second quarter of 2012, up 3.6 percent over the same period last year. Adjusted EBITDA remained relatively flat at $189.8 million. The company notes that this year's results benefitted from a full quarter's contribution from M Resort, which the company owned for just one month in last year's second quarter. Six of the sixteen properties operated by Penn National reported year-over-year revenue increases, while eight reported adjusted EBITDA growth. The East/West segment, which included the M Resort in Las Vegas, reported net revenues of $348.7 million in the second quarter, up 9.4 percent over the same quarter in 2011. Adjusted EBITDA increased 8.6 percent to $98.4 million.
  • Pinnacle Entertainment (PNK) - Net revenues for Pinnacle Entertainment increased 3.1 percent to $298.3 million during the second quarter. Adjusted EBITDA increased 24.7 percent to $73.2 million, attributable to record EBITDA increases at L'Auberge Lake Charles as well as a strong performance in St. Louis. The second quarter of 2012 represents the tenth consecutive quarter in which the company reported revenue, EBITDA and EBITDA margin growth. In Nevada, the company closed the disposition of Boomtown Reno for approximately $12.9 million on June 26, 2012.
  • Las Vegas Sands (LVS) - During the second quarter of 2012, Las Vegas Sands reported net revenues of $2.6 billion, up 10.1 percent over a year ago. However, adjusted EBITDA decreased 6.3 percent to $844.7 million, while EBITDA margin fell 5.7 percentage points to 32.7 percent, due to lower hold in Macao, Singapore and Las Vegas. The second quarter of 2012 appears to have been a positive one for players, with almost all of the companies in the AAGI reporting results that were significantly impacted by lower than expected hold. In Las Vegas, net revenues declined 1.6 percent to $327.3 million, while adjusted EBITDA fell 28.5 percent to $64.4 million. Non-gaming segments, including food and beverage and convention, retail and other revenue reported increases of 3.8 percent and 4.3 percent, respectively, during the second quarter. Room revenues decreased by a modest 0.1-percent, due to a 0.6-percent decline in revenue per available room (RevPAR). Although average daily room rate (ADR) reported a 2.5-percent increase to $205, the decline in RevPAR is attributable to a 2.6-point decline in occupancy rate to 86.2 percent. Currently, the company is renovating 1,000 rooms and remodeling the gaming floor at The Venetian and plans to offer new entertainment in the fall.
  • International Game Technology (IGT) - International Game Technology reported a 9-percent increase in net revenues to $532.8 million during the latest quarter, primarily attributable to interactive businesses and North America machine sales. Gaming operations revenue increased 13 percent to $301.2 million. However, excluding interactive businesses, gaming operations revenue remained flat year-over-year. Product sales revenue improved during the quarter, increasing 5 percent to $231.6 million; the company noted North America product sales increased while international sales were down year-over-year. Despite the revenue increase, average machine sales price declined 11.0 percent to $13,700 mainly due to an unfavorable pricing mix. Also notable, replacement sales in North America increased 43.5 percent to 5,600, while internationally, the company experienced lower sales in Europe and South America but increased shipments to Australia, Asia and Mexico.

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July 2012

Weak Investor Demand Drives Down Gaming Sector Valuations

By the mid-point of 2012, investor demand within the gaming sector retreated from a position that resembled recovery to one more of caution. The Applied Analysis Gaming Index (AAGI) posted its second consecutive monthly decline in June 2012, dragging the composite score to 403.74, a level not witnessed since the October 2010 timeframe. The decline during June totaled 31.01 points, or 7.3 percent, while the AAGI remains down 14.2 percent on a year-over-year basis. Performances within the broader economy contributed to the sector's performance as the S&P 500 was off 1.3 percent month-to-month. However, on an annual basis, the broader equities' markets are generally outperforming the gaming industry (+2.8 percent).

Economic concerns - domestically and internationally - remain top of mind for the investment community. The gaming sector is not immune to broader trends, and in many instances, is more susceptible to market volatility given the source of revenues for major gaming operators. Valuations dropped for all major gaming companies comprising the index during June and several of the price declines were in the double-digits. We expect speculative investor demand to continue as attractive price points have emerged relative to levels reported earlier in the year.

Selected industry highlights reported during the month included the following:

  • International Game Technology (IGT) Initiates Share Repurchase Program - IGT announced a common stock buyback program up to $1 billion. As part of the initiative, IGT entered into an accelerated buyback agreement for the initial $400 million. The balance of the repurchases is expected over the course of the next 3 to 4 years. Stock purchases will be funded through cash on hand and the company's revolving credit facility.
  • Ameristar Casinos (ASCA) Set to Acquire Creative - The regional casino operator Ameristar Casinos (ASCA) obtained regulatory approval from the Louisiana Gaming Control Board to acquire the equity interest in Creative Casinos of Louisiana, LLC. The acquisition target is the developer of a property in Lake Charles, which is the last gaming license in the state (under current law). Ameristar Casino Resort Spa Lake Charles, the proposed project, is expected to have 1,600 slot machines, 60 table games, and a hotel (700 guest rooms) and supporting amenities. The closing is expected in July 2012.
  • MGM Resorts International (MGM) Makes Moves in Maryland - MGM Resorts International (MGM) announced a deal with Peterson Companies to develop a destination resort facility at National Harbor located along the Potomac River in Maryland. The proposed development is programmed with 4,000 video lottery terminals (VLTs), 250 table games and a number of retail and entertainment offerings. The transaction requires the Maryland legislature to permit a sixth gaming license at National Harbor and approval in a statewide referendum by resident voters.
  • Las Vegas Sands (LVS) Continues with European Interest - Las Vegas Sands (LVS) is reportedly evaluating development opportunities in Barcelona and Madrid. The proposed project is intended be a massive investment that may include upwards of 12 hotels and six casinos. The two markets in Spain remain under evaluation.
  • Pinnacle Entertainment (PNK) Unloads Boomtown Reno - Pinnacle Entertainment (PNK) officially closed on the sale of the Boomtown Reno casino project, which was sold to M1 Gaming Reno, LLC and SJP Reno Property, LLC for approximately $12.9 million. The deal provides a one-year option to purchase additional land (27 acres) adjacent to the existing facility for $3.8 million.
  • Gaming Manufacturers Go to the Internet - According to Bally Technologies (BYI), the slot maker and systems developer was the first company to receive an interactive gaming supplier license from the Nevada Gaming Control Board. Nevada is also the first to move forward with a licensing process to permit interactive and online gaming. BYI quickly launched GoldenNuggetPoker.com, a play-for-fun site, developed on its iGaming platform. International Game Technology (IGT) was also approved for interactive gaming the same day.

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June 2012

Gaming Sector Stocks Struggle in Recent Weeks

The gaming sector experienced weakened investor demand during May 2012 as concerns about foreign debt crises continued, profit-taking emerged, earnings report cards were mixed, and gaming expansion opportunities in emerging markets for selected operators were made clearer. The sector also witnessed key acquisitions in regional markets as operators look to expand their footprints when opportunities present themselves. The latest monthly performance eliminated the cumulative gains reported during the preceding three months, bringing the Applied Analysis Gaming Index (AAGI) to a level on par with January 2012.

By the close of May 2012, the AAGI retreated 61.49 points (-12.4 percent) to a composite score of 435.74 points from 497.24 points in the preceding month. The rate of decline on a month-to-month basis far outpaced the broader market as the S&P 500 dipped by 3.3 percent during the same timeframe (when computed on a similar basis). Compared to the same month of the prior year, the gaming sector was off 11.6 percent while the broader market edged slightly upward (+0.2 percent). Going forward, investors are likely to find value in selected gaming operators and equipment makers that continue the deleveraging process and/or remain opportunistic in growth strategies.

Selected financial and operating activity reported during the month included the following:

  • Boyd Gaming (BYD) - Boyd Gaming (BYD) announced the acquisition of regional gaming operator Peninsula Gaming, which is subject to regulatory and customary closing procedures. The deal allows Boyd to further diversify its revenue composition - and possibly its earnings composition to a greater extent - a scenario that may bode well for the Vegas-based gaming operator with operations in Atlantic City as well. Stability may prove to be the biggest 'return' from this transaction. Currently, Boyd's Midwest and South markets represent 35 percent of its EBITDA total. On a pro forma basis reflecting the acquisition, the regions will account for 54 percent of total EBITDA. The Las Vegas Locals market would decline from 34 percent of total EBITDA to 24 percent and Atlantic City is expected to reflect 22 percent of EBITDA (down from 31 percent). Management noted limited supply in the areas where Peninsula has operations, stable tax and regulatory environments and generally resilient markets from an economic standpoint. The transaction is valuated at $1.45 billion, which comes with five properties: Kansas Star Casino near Wichita, Kansas; Diamond Jo Casino in Dubuque, Iowa; Diamond Jo Worth in Northwood, Iowa; Evangeline Downs Racetrack & Casino in Opelousas, Louisiana; and Amelia Belle Casino in Amelia, Louisiana. The price reflects a 7.0 times multiple of trailing 12-month EBITDA ($109 million) for Peninsula's Iowa and Louisiana properties, an annualized run-rate for Kansas Star based on its first quarter 2012 EBITDA ($26.8 million) and corporate expense of approximately $10 million.
  • Penn National Gaming (PENN) - Penn National (PENN) announced a deal to buy Harrah's St. Louis (located in Maryland Heights, Missouri) from Caesars Entertainment for approximately $610 million. The transaction represents a multiple of approximately 7.75 times the property's trailing 12-month EBITDA. The deal is expected to close in the second half of 2012. Penn National (PENN) is expected to re-brand the casino with the company's Hollywood-themed brand. In May, PENN also opened the $320-million Hollywood Casino Toledo in northwest Ohio.
  • Wynn Resorts, Ltd. (WYNN) - First quarter earnings released by Wynn Resorts (WYNN) early in the month did not turn heads. Net revenues for the quarter were $1.3 billion, up modestly from the prior year. Revenue composition shifted as WYNN's Macau operations posted a 9.8-percent increase while Las Vegas-based revenues dipped 8.1 percent. Adjusted property EBITDA was off ($390.7 million vs. $405.0 million) primarily due to a shift in the hold percentage at the tables in Vegas (23.6-percent decline in Vegas EBITDA) while Macau edged up 6.2 percent. Reports also suggest WYNN has opted not to pursue a gaming license in Massachusetts.
  • Caesars Entertainment (CZR) - Management changes at Caesars Entertainment have the company's Executive Vice President and Chief Financial Officer Jonathan Halkyard departing the gaming giant for NV Energy, a Nevada-based utility provider.

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May 2012

Gaming Index Edges Higher, Again

Investor demand for gaming stocks continued to press forward during the month of April. The latest activity resulted in the fourth consecutive monthly increase in as many months during the current year. While gaming operators posted mixed results, the gaming equipment manufacturer component of the Applied Analysis Gaming Index (AAGI) witnessed increased stock prices for all contributors. The AAGI ended April 2012 at a composite score of 497.24, which represented an 8.24-point increase, or a gain of 1.7 percent month-to-month. The increase was primarily sourced to positive movements in the stock prices of Las Vegas Sands (LVS), Caesars Entertainment (CZR) and all reporting equipment makers. Positive first quarter earnings reports by several gaming companies suggest market fundamentals may be improving and investor expectations are running high. Strong growth in relatively new markets proved positive for the industry while demand for slot machines appears to be resuming.

The AAGI's increase of 1.7 percent during April bucked the trend reported in the broader equities markets as the S&P 500 posted a modest 0.2-percent decline in value. On a year-over-year basis, the gaming sector remains up 2.3 percent but lags gains in the market as a whole (the S&P 500 remains up 4.1 percent on an annual basis).

Selected quarterly earnings reports released during the month include the following:

  • International Game Technology (IGT) - International Game Technology (IGT) reported net revenues of $541.2 million during the company's fiscal second quarter of 2012, up 13 percent over the prior year primarily due to increases in North American product sales and interactive businesses. Gaming operations revenue increased 11 percent to $300.4 million, attributable to increases in the interactive businesses and installed base. In North America, the installed base increased 5.4 percent to 42,700; total international installations rose 11.7 percent. Product sales revenues increased 16.2 percent to $240.8 million, attributable to increases in unit sales and average selling price. Units shipped in North America increased 26.4 percent to 6,700, with replacement shipments accounting for 74.6 percent of total deliveries. Meanwhile, units shipped internationally increased 5.6 percent to 3,800, with replacement shipments accounting for 47.4 percent of the total. Average selling price per unit increased 8.2 percent to $15,800.
  • Boyd Gaming (BYD) - Boyd Gaming (BYD) reported net revenues of $633.1 million for the first quarter of 2012, up 12.1 percent from the $564.9 million reported during the same period last year. Adjusted EBITDA increased 19.7 percent to $133.8 million. The relatively strong performance overall was primarily sourced to operations outside Nevada, particularly in the Midwest and South regions. In Las Vegas, the locals market reported net revenues of $154.8 million during the first quarter, up slightly (+0.2 percent) from the year ago period. Adjusted EBITDA in the market declined 2.9 percent to $38.5 million. The slight decline in EBITDA was attributable to increased promotional activity in the market, along with an increase in marketing expense. In addition, table game hold at The Orleans and the Gold Coast were off the prior year. Downtown, net revenues increased 2.4 percent to $57.0 million, while adjusted EBITDA fell 6.4 percent to $8.4 million. Boyd Gaming notes that the segment reported strong performance in non-gaming revenue, along with an increase in rated play. However, the company experienced an increase in jet fuel expense for its Hawaiian charter service, which negatively impacted EBITDA.
  • Las Vegas Sands (LVS) - Net revenues for Las Vegas Sands (LVS) increased to a record $2.76 billion during the first quarter of 2012, up 30.8 percent over the year ago period. Adjusted EBITDA increased 43.0 percent to a record $1.07 billion. In Las Vegas, the Venetian and the Palazzo reported net revenues of $384.6 million, up 26.1 percent over the first quarter of 2011, attributable to a 91.0-percent increase in casino revenue to $158.7 million and a 17.6-percent increase in convention, retail and other revenue to $74.7 million. Adjusted EBITDA increased 77.6 percent to $115.8 million, while adjusted EBITDA margin was up 8.7 percentage points to 30.1 percent. The occupancy rate at the company's Las Vegas properties declined a modest 0.5 percentage points to 83.4 percent, while average daily room rate (ADR) increased 0.9 percent to $214. The company notes that cash ADR increased 4.9 percent during the quarter, due to strong group meeting and convention business. During the first quarter, Las Vegas Sands opened the first phase of Sands Cotai Central, located at the center of the Cotai Strip. At completion, the property will include 6,400 hotel rooms.

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April 2012

International Exposure Lifts Index

Throughout the first quarter of 2012, gaming sector stocks experienced increasing demand; notably, March represented the third consecutive monthly increase. While selected operators reported some volatility, two of the major players with interests abroad outshined others during the month. Wynn Resorts, Ltd. (WYNN) posted a 9.1-percent rise from the prior month (February 2012), contributing 16.15 points to the Applied Analysis Gaming Index (AAGI), while Las Vegas Sands (LVS) improved by 7.8 percent. The gains posted by these two large-cap companies were somewhat offset by softness reported by others. The gaming equipment manufacturer component of the index remained relatively flat during the month with gains by Bally Technologies, Inc. (BYI), International Game Technology (IGT) and Shuffle Master, Inc. (SHFL) offset by a modest downturn by WMS Industries (WMS). Overall, the AAGI posted a respectable 6.8-percent (31.20-point) rise from the prior month, reaching a composite score of 489.00 by the end of March 2012. With limited financial reports from operators and manufacturers, pricing movements were largely sourced to regulatory changes (e.g., Chinese junket approvals), expectations for gaming expansions into new markets, and broader investor speculation.

On a year-over-year basis, the AAGI remains up 10.0 percent. Recent movements within the gaming sector outpaced the broader equities markets. The S&P 500, when computed on a similar basis, was up a more modest 2.7 percent in the month and gained 6.5 percent year-over-year. It is worth noting that the contributors to the AAGI shift from time-to-time as market conditions and other factors dictate. With the recent initial public offering (IPO) for Caesars Entertainment (CZR) taking place in February 2012, the global gaming operator re-entered the AAGI rankings after a more than four-year hiatus. Recall Caesars de-listed from the NYSE in January 2008 when private equity firms acquired the company. The AAGI also announced the debut of Shuffle Master, Inc. (SHFL) in the March 2012 release to provide a broader range of firms in the gaming equipment manufacturer component of the composite score.

Key industry events and highlights during the past month that contributed to the latest stock performances included the following:

  • Caesars Entertainment Seeks to Raise More Equity - In the first month of trading following CZR's IPO, the company filed regulatory documents to raise up to an estimated $500 million through additional equity issuances (under a shelf registration). Concurrently with the regulatory filings to raise equity for the company, a registration statement was also filed to authorize existing shareholders to sell upwards of 22.3 million shares (+/- $266.7 million). The proceeds of this additional offering are not expected to inure to the benefit of Caesars, rather provide an opportunity for existing stockholders to liquidate a portion of their investment.
  • Ameristar Casinos to Acquire Lake Charles, Louisiana Casino Rights - The regional gaming operator Ameristar Casinos (ASCA) announced an arrangement to acquire the equity interest of Creative Casinos of Louisiana, LLC, the company with rights to develop a casino-resort in Lake Charles, Louisiana. Plans called for the construction of the Mojito Pointe property. The rights, which reflect the last remaining riverboat gaming license available in the state, is subject to regulatory approvals. The total purchase price is $32.5 million. The proposed project is located on a 242-acre site and is adjacent to the existing L'Auberge du Lac Casino Resort. The property is expected to house 1,600 slot machines, 60 table games, 700 hotel rooms and number of other amenities. The total project investment is expected to reach a minimum of $500 million, with a possible opening in mid-2014.
  • IGT Gains Access to Italian Market - International Game Technology (IGT) announced a strategic partnership with Lottomatica Group to deliver game content and terminals to the Italian VLT gaming market. The Italian gaming market is substantial (estimated as a two-billion dollar-plus gaming market). Lottomatica Group is reportedly one of the largest players in the Italian gaming space.
  • MGM Resorts Exits Initial Plans in Massachusetts Market - The Vegas-based gaming operator MGM Resorts International (MGM) has dropped plans to develop a hotel-casino property in Brimfield, Massachusetts. The company noted they will seek an alternative site within the western portion of the state.

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February 2012

Gaming Operators Press Index Forward

For the second consecutive month, the gaming sector witnessed increased investor interest as valuations pressed north. The Applied Analysis Gaming Index (AAGI) increased 4.3 percent (+19.02 points) to a composite score of 457.79 by the close of February 2012. The bulk of the increase was sourced to positive stock performances turned in by gaming operators, while the gaming equipment manufacturer component of the index slid marginally during the past month. The broader equities markets turned in comparable results, edging up 4.0 percent during the same period (S&P 500 when computed on a similar basis). Compared to the prior year, the gaming sector inched up 0.8 percent while the S&P 500 was up 2.4 percent.

The latest reporting period witnessed an initial public offering for Caesars Entertainment (CZR), an unusual move by Wynn Resorts, Ltd. (WYNN) and one of its key stockholders, and a series of fourth quarter earnings reports. Recent activity shed additional light on an industry that appears to be benefiting from increased economic stability, improved fundamentals and relatively efficient operating leverage.

  • Caesars Goes Public - On February 7, 2012, Caesars Entertainment priced its initial public offering (IPO) at $9 per share. The offering hit the public markets the following day under the stock symbol CZR and witnessed a sharp increase in the first trading session as the stock soared 71 percent from $9.00 to close at $15.39 per share. Recall that Caesars made previous attempts to take the company public in the prior year, but the markets didn't cooperate. The offering, while important for existing investors to create a liquid market for the stock, was not intended to raise significant capital for the benefit of the company. Since the initial offering, the stock has traded towards the IPO price. Going forward, Caesars Entertainment (CZR) is expected to be included in the AAGI.
  • Wynn Stockholder Dispute - Wynn Resorts, Ltd. (WYNN), the international casino company, continues to battle with a long-time key stockholder, Kazuo Okada. The dispute, while not initially intriguing as it relates to the financial statements, has quickly turned into a major story for the company. Wynn Resorts (WYNN) announced on February 19, 2012 that it had concluded a year-long investigation of Aruze USA, Inc., its parent company Universal Entertainment Corporation and its principal stockholder, Kazuo Okada. The report alleges misconduct related to a number of laws and Wynn's internal code of conduct. Citing "unsuitability," Wynn Resorts (WYNN) requested Okada's resignation from Wynn's board of directors and immediately redeemed the approximately 24 million shares held by Aruze USA, Inc. The redemption resulted in a 10-year $1.9 billion promissory note in exchange for the shares. The transaction provided a boost to Wynn shares in the following day of trading. The dispute is expected to continue and result in legal wrangling for the foreseeable future.
  • Las Vegas Sands (LVS) Reports Growth - Net revenues for Las Vegas Sands (LVS) totaled a record $2.54 billion for the fourth quarter of 2011, up 26.3 percent over the same period in 2010. In addition, adjusted EBITDA increased 30.0 percent to a company and industry record of $960.6 million, attributable to continued growth at its properties in Macao and Singapore. Las Vegas Sands reports that in less than two months, it will be celebrating the debut of the largest Integrated Resort in the company's history, with the opening of Sands Cotai Central. In Las Vegas, net revenues at Venetian and Palazzo increased 9.3 percent to $339.5 million. Casino revenues declined 2.9 percent to $118.3 million during the quarter. However, room revenues increased 11.0 percent to $110.6 million, attributable to stronger group meeting and convention business. Revenue per available room (RevPAR) increased 13.0 percent to $174, due to a 9.0-percentage-point increase in occupancy rate and a 1.6-percent increase in average daily room rate. In addition, food and beverage revenues increased 9.7 percent during the quarter, while convention and retail revenues increased 21.7 percent.
  • Wynn Resorts, Ltd. (WYNN) Leverages Convention Business - Net revenues for Wynn Resorts, Ltd. (WYNN) reached $1.3 billion in the fourth quarter of 2011, up 8.6 percent over last year. The increase was largely attributable to a 9.1-percent increase in Macau and a 7.2-percent increase in Las Vegas. Adjusted EBITDA increased 10.1 percent to $402.2 million, due to a 5.5-percent increase in Macau and a 30.3-percent increase in Las Vegas. Casino revenues in Las Vegas increased 4.7 percent to $145.8 million during the quarter, with a table games win percentage of 23.3 percent, which is within the expected range. The company notes that its casino win of $776 million in 2011 in Las Vegas broke the historical record for a licensed gaming facility in the state of Nevada. In addition, all non-gaming segments reported increases during the quarter, resulting in an increase in non-gaming revenue of 6.8 percent to $246.6 million. Room revenues increased 11.7 percent during the quarter due to a 6.3-percent increase in average daily rate and more rooms available (9 percent were out of service in the prior year quarter for renovations). Wynn Resorts notes that 2011 was a breakthrough year in terms of revenue generated by convention trips.
  • MGM Resorts International (MGM) Reports Room Demand - MGM Resorts International (MGM) reported net revenue of $2.3 billion during the fourth quarter of 2011, representing a 7.0-percent increase over the same quarter of 2010 (excludes MGM China which was not consolidated until June 2011). Adjusted EBITDA at the company's wholly owned domestic resorts increased 18.0 percent to $319 million. The company notes that throughout 2011, it has enhanced customer experience through reinvestments in its properties and the M life customer loyalty program. On the Las Vegas Strip, net revenues increased 8.3 percent to $1.2 billion, while adjusted EBITDA increased 19.8 percent to $260.0 million. RevPAR increased 13.0 percent in the fourth quarter to $111, due to a 3.0-percentage point increase in occupancy to 87 percent and a 9.3-percent increase in average daily room rate to $129. Of the MGM Resorts' Las Vegas Strip properties, Monte Carlo reported the highest occupancy rate of 92.4 percent, up 3.8 percentage points, while Mirage was close behind with a rate of 92.0 percent, up 2.0 percentage points. Earlier this month, the company announced a strategic marketing relationship with Ameristar Casinos Inc. The agreement will allow MGM Resorts' M life members to receive benefits at Ameristar properties and Ameristar's Star Awards/Plateau Players Club members to receive benefits at MGM Resorts' properties.
  • Boyd Gaming (BYD) Posts EBITDA Improvement - Boyd Gaming (BYD) reported net revenues of $606.7 million during the fourth quarter of 2011, up 9.9 percent when compared to the same quarter of last year. Adjusted EBITDA was $114.3 million, representing a 14.3-percent increase over 2010. The fourth quarter of 2011 represents the first time in several years that revenue increases were reported in each of Boyd's business segments. In the Las Vegas Locals market, net revenues were up slightly compared to the prior year quarter at $152.7 million, while adjusted EBITDA increased 8.0 percent to $36.8 million, attributable to year-over-year EBITDA growth at all four major properties in the region. The company's downtown Las Vegas segment reported an increase of 2.7 percent in net revenue to $58.7 million, while adjusted EBITDA remained flat due to elevated fuel expense associated with Boyd's Hawaiian charter service. Boyd remains optimistic about the downtown segment, given development activity in the area. The company also continues to support the legalization of Internet gaming and is prepared to enter the market on a state-by-state basis, if necessary.
  • Ameristar Casinos (ASCA) Continues Cost Cutting - Ameristar Casinos reported net revenues of $296.2 million during the fourth quarter of 2011, up a modest 0.7 percent when compared to the same quarter of last year. Adjusted EBITDA increased 8.7 percent year-over-year to $84.3 million, with six of the company's properties reporting EBITDA growth. The company attributes its performance during the quarter to the company's delivery of a superior guest experience, focus on cost management and effective marketing. Ameristar's properties in Jackpot, Nevada reported net revenues of $14.4 million during the quarter, representing an 8.0-percent increase over last year. Adjusted EBITDA for the Jackpot properties increased 52.8 percent to $4.1 million, which represents the highest percentage EBITDA increase of all the company's reporting units. In addition, the Jackpot properties' adjusted EBITDA margin increased 8.4 percentage points to 28.7 percent.
  • Bally Technologies (BYI) Expands Revenue - Bally Technologies reported net revenues of $210.4 million during its fiscal second quarter of 2012, representing a 15.2-percent increase over last year, attributable to revenue increases in each of the company's business segments. Adjusted EBITDA increased 17.5 percent year-over-year, from $57.2 million to $67.2 million. Gaming equipment revenues increased 18.6 percent to $70.2 million. The increase is attributable to a 4.8-percent increase in unit sales to 3,636 and a 12.8-percent increase in new unit average selling price to $17,201. Gaming operations revenue was $86.2 million for the quarter, representing an 11.8-percent increase over last year, attributable to growth in the installed base of premium and wide-area progressive games. The latest quarter represents the fourth sequential quarter of record gaming operations revenue. Systems revenue increased 16.4 percent to $54.0 million, due to increases in software and services and maintenance revenues. Maintenance revenues increased approximately 12.5 percent to a record $18.0 million during the quarter.
  • International Game Technology (IGT) Gaming Operations Outpace Equipment Sales - Net revenues for International Game Technology declined 1.3 percent during its fiscal first quarter of 2012 to $445.5 million, which the company attributes to fewer new casino openings in North America. Gaming operations revenues were $264.6 million, up 4.6 percent year-over-year, primarily attributable to a 28.9-percent increase in international gaming operations revenue. The company's installed base increased 5.7 percent to 55,600, also partly attributable to strong growth abroad. Product sales revenues declined 8.8 percent to $180.9 million, attributable to a 23.0-percent decline in North American sales revenues. The number of units shipped declined 13.3 percent, from 7,500 to 6,500. In North America, 3,500 units were shipped, 80 percent of which were replacements. Meanwhile, 3,000 units were shipped internationally, 57 percent of which were replacements. Adjusted EBITDA also declined during the quarter, falling 12.1 percent to $162.7 million. The company notes the recently finalized acquisition of Double Down Interactive is expected to add new distribution channels for its game content, including popular platforms such as Facebook.
  • WMS Industries (WMS) Top Line Dips - WMS reported net revenues of $162.2 million during its fiscal second quarter of 2012, down 18.8 percent when compared to the same period of last year, attributable to declines in both product sales revenues and gaming operations revenues. Total product sales revenues declined 23.3 percent to $97.5 million, with new unit sales revenues declining 24.6 percent to $79.1 million. The decline in product sales revenue is attributable to both declines in new unit shipments (down 23.2 percent to 4,846) and average sales price per new unit (down 1.8 percent to $16,325). Gaming operations revenues declined 11.0 percent to $64.7 million. At the end of the quarter, WMS reported total installed participation units of 9,282, down 8.8 percent from the same period last year. Adjusted EBITDA declined 12.6 percent to $57.7 million, with an adjusted EBITDA margin of 35.6 percent (an improvement from the prior year quarter margin of 33.0 percent).

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February 2012

Investor Demand for Gaming Stocks Rises in First Month of 2012

Gaming operators and manufacturers all posted positive gains in their stock performances during the first month of the new year. While the majority of contributors to the Applied Analysis Gaming Index (AAGI) reported stock prices below the same month of the prior year, strong gains in the past month pressed the composite index north. The AAGI increased by 11.87 points, or 2.8 percent, during January 2012 as compared to the final month of 2011. The S&P 500 (when computed on a similar basis) posted a 4.6-percent increase from the preceding month. Compared to the same month of the prior year, the broader market gauge was up 1.4 percent, while the AAGI dipped by 0.4 percent year-over-year.

Much of the pricing improvements in the gaming sector were sourced to greater profitability expectations rolling into the upcoming earnings report season, broader equities market performances and a modest bump associated with stronger-than-expected gross domestic product (GDP) results in China.

MGM Resorts International (MGM) and Boyd Gaming (BYD) were standouts during the past month, both reporting double-digit gains in their daily average stock price. The two Las Vegas-based gaming companies have lagged performances reported by operators with a varied and international asset portfolio during the past two years. Investor speculation suggests increased value has been assigned to the two Vegas-centric organizations - one catering primarily to a diverse tourist market and the other focused on local and regional residents within the markets in which they compete. While the operating environment remains somewhat fragile, increased stability in the market provides a strong foundation from which operators will be measured going forward.

The following highlights other relevant industry events during the first month of 2012.

  • Sands China Visitation Up - According to media reports, Sands China noted visitation to its Macau resorts increased by 5 to 6 percent during the New Year holiday, bringing the count to more than one million during the weeklong celebration. The Venetian Macao property reportedly attracted 750,000 visitors, with Sands Macao and Plaza Macao reporting 160,000 and 150,000 visitors, respectively.
  • Earnings Report Season - The following highlights timing for upcoming earnings reports and conference calls to discuss results.
    Company Ticker Release Conference Call
    Ameristar Casinos ASCA Wed., February 1, 2012 (AM) 11:00 AM ET
    Las Vegas Sands LVS Wed., February 1, 2012 (PM) 4:30 PM ET
    Bally Technologies BYI Wed., February 1, 2012 (PM) 4:30 PM ET
    Penn National Gaming PENN Thurs., February 2, 2012 (AM) 10:00 AM ET
    Wynn Resorts, Ltd. WYNN Thurs., February 2, 2012 (PM) 4:30 PM ET
    Boyd Gaming BYD Tues., February 21, 2012 (AM) 12:00 PM ET
    MGM Resorts International MGM Wed., February 22, 2012 (AM) 11:00 AM ET
  • Massachusetts Gaming Opportunity - In addition to Wynn Resorts' (WYNN) proposed Massachusetts investment, a number of other players continue to seek out gaming opportunities in the state. During January 2012, MGM Resorts International (MGM) executed an arrangement to acquire approximately 150 acres of developable property in Brimfield, Massachusetts for a proposed facility. Additionally, Ameristar Casinos (ASCA) closed on a 41-acre site in Springfield, Massachusetts. Mohegan Sun also continues to pursue a development opportunity in Palmer.
  • Debt and Equity Transactions - MGM Resorts International (MGM) issued $850 million in 8.525-percent senior notes due in 2019. MGM expects to the use the net proceeds to repay a portion of its existing debt. Sands China Ltd. announced its first dividend, with an expected payout on February 28, 2012. The dividend, estimated at 58 Hong Kong cents per share, was deemed appropriate by management as the company "has determined that it has sufficient reserves, after the payment of this interim dividend, to finance its operations and the expansion of its business, including the development of additional integrated resorts."
  • Wynn Resorts Stockholder Dispute - While not particularly insightful to the upcoming financial report for Wynn Resorts, Ltd. (WYNN), the international casino company appears to be battling with a key stockholder, Kazuo Okada. Accusations regarding the appropriateness of company expenditures and access to financial record are allegedly being reported, while WYNN representatives suggest other reasons for the spat (and subsequent legal wrangling). Wynn Resorts (WYNN) recently requested a dismissal of the claims by Okada. No movement has taken place as of the release of this summary.

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January 2012

Gaming Stocks Close Out 2011 With a Down Month, Yet Remain Ahead of the Prior Year

As 2011 comes to a close, gaming companies are looking forward to a more prosperous 2012. While gaming companies' stock and financial performances outpaced 2010 in aggregate, individual operators and manufacturers experienced varying degrees of success. During the final month of the year, speculation about the impact of Internet-based poker, new developments in emerging markets and broader economic conditions were key drivers of the sector's performance.

The gaming operator component of the AAGI (7 out of 10 companies) accounted for the bulk of the monthly decline, while gaming equipment manufacturers (3 out of 10 companies) posted relatively flat results. Wynn Resorts, Ltd. (WYNN) reported the biggest decline from the preceding month (November 2011) with a 9.7-percent decline in its average daily stock price. However, it remains one of few that are reporting valuations higher than where they started the year (+7.0 percent).

Operators that bucked the broader trends during the month included Boyd Gaming (BYD), Penn National Gaming (PENN) and Ameristar Casinos (ASCA). Given the relative size of these regional casino operators, their gains were not sufficient to offset losses posted by others. BYD emerged with a 4.8-percent rise, PENN rose 5.3 percent and ASCA edged up a modest 0.6 percent.

From a gaming manufacturer perspective, Bally Technologies (BYI) reported a 3.3-percent increase in its daily average stock price in December compared to November 2011. The upward movement was in contrast to declines reported by International Game Technology (IGT) (down 2.8 percent) and WMS Industries (WMS) (down 1.1 percent).

During the final month of 2011, the Applied Analysis Gaming Index (AAGI) posted its third consecutive monthly decline. As of year-end, the composite score for the AAGI fell to 426.90, a decrease of 6.7 percent compared to November 2011. For comparison purposes, the broader equities markets moved in a contrasting direction with the S&P 500 posting a 1.4-percent gain during the same timeframe (when computed on a similar basis). The gaming sector's performance remained ahead of the broader market when compared to the same month of the prior year, as it edged up 2.6 percent. The S&P 500 remained essentially flat when compared on an annual basis.

The following highlights other relevant industry events and issues that remained top of mind during December 2011.

  • Internet-Based Gaming Activity - Gaming stocks generally experienced a short-term spike following the U.S. Justice Department's relaxed stance regarding online gaming restrictions. The latest information suggests fully-regulated gaming activity on the Internet soon may be a reality as gaming operators continue to jockey for position on the web. Additionally, Nevada gaming regulators moved forward with rules that could potentially make the Silver State the first to allow for Internet-based poker. The move positions Nevada to take advantage of any changes at the Federal level, should they occur. In advance of any Federal regulatory changes, the Nevada Gaming Commission's actions also provide an opportunity for online poker to take place for consumers physically located within the state's borders. While many gaming operators have already entered into strategic alliances with existing online gaming companies, others have not. Early in December, Sheldon Adelson, the principal shareholder of Las Vegas Sands (LVS), publicly commented about his opposition to online gaming activity; his comments have been tied to his personal opinions rather than the official position of the company.
  • Massachusetts Gaming Opportunity - Following recent moves taken by the state of Massachusetts, speculation regarding potential gaming sites and operators continues to swirl. Wynn Resorts, Ltd. (WYNN) has been involved in the latest discussions with a proposed $1-billion investment adjacent to Gillette Stadium, home of the New England Patriots football team. The proposal continues to face challenges as Foxborough's Board of Selectmen indicated they don't support the project proposal. It appears there are other options for the project proposers that could keep the resort development alive.
  • Sands China Investigation Update - Sands China Ltd., the Macau unit of Las Vegas Sands (LVS), announced that the entity was cleared in an investigation regarding compliance with the Foreign Corrupt Practices Act (the "Act"). The Act prohibits US firms from bribing or making payments to foreign officials in exchange for favorable treatment. The positive result was sourced to inquiries by the Securities and Futures Commission, a Hong Kong regulator, which appears to be a step in the right direction for the international gaming operator.
  • Las Vegas Sands Eyes Expansions - Reports suggest that Las Vegas (LVS) is seeking a development opportunity in Vietnam. The potential $2-billion resort complex would be located in Ho Chi Mihn City. Along with other potential operators, Las Vegas Sands (LVS) is reportedly taking a look at what a casino property in Florida might look like, as well. Speculation continues as the majority of operators seek to expand their footprint.

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December 2011

Despite Stock Price Rally Late in the Month, Gaming Index Slips in November

During the month of November 2011, the gaming sector posted mixed results as the third quarter earnings season continued and broader economic conditions impacted valuations. Financial performances generally improved for both operators and equipment manufacturers. Challenges that continued to suppress stock prices for some were sourced to Eurozone instability, Macau market speculation, and continued domestic economic uncertainty. By the close of November 2011, the Applied Analysis Gaming Index (AAGI) reached a composite score of 457.47, which reflects a 2.8-percent decline from the preceding month (-13.10 points). The gaming sector moved in an opposite direction from the broader market as the S&P 500 expanded by 1.6 percent during the month (when computed on a similar basis). However, compared to the same period of the prior year, the gaming sector remains up 4.7 percent, outpacing the broader market's 2.3-percent gain. It is worth noting, positive gains sourced to central banks' actions reported on the last day of trading in November will not be fully realized until December, assuming the gains hold. On November 30, 2011, major central banks worked together to lower the cost of temporary loans to banks by one half of one percentage point. The move effectively increased liquidity and assisted in easing investor concerns about another financial crisis or recession. As a result, gaming stocks surged along with broader markets (DJIA +4.2 percent; S&P 500 +4.3%).

Also during November, Caesars Entertainment revived a plan to offer its shares on the public market with its preliminary IPO filing. Regulatory hurdles require companies to file initial documents for review as they work through the fund raising process. While the total proceeds anticipated in the capital raise are relatively modest compared to a similar attempt considered last year, the offering would provide a market to gauge investor interest. If made public, Applied Analysis is expected to incorporate Caesars into the operator component of the AAGI. In Las Vegas, Caesars has announced plans for the completion of the Octavius Tower at Caesars Palace and the fourth quarter commencement of the $500-million Linq project located on the east side of the Las Vegas strip.

Also during the month, Boyd Gaming (BYD) terminated the sale of its Dania Jai-Alai operations with Dania Entertainment LLC. The prospective buyer previously extended the closing date, which has since expired. As such, Boyd decided to terminate the transaction and opted to operate the facility on a go-forward basis.

The following highlights selected third quarter earnings reports released during the month of November 2011.

  • MGM Resorts International (MGM) - MGM Resorts International (MGM) reported total net revenues of $2.2 billion during the third quarter of 2011, a 42.5-percent increase over the same quarter of 2010 largely due to the consolidation of MGM China. In addition, adjusted property EBITDA increased 60.1 percent to $492.1 million. In Las Vegas, net revenues increased 3.5 percent to $1.2 billion, while adjusted EBITDA increased 9.7 percent to $267.9 million. RevPAR increased 12.5 percent, attributable to an increase in ADR of 11.7 percent and an occupancy rate of 95 percent. During the quarter, MGM Resorts continued room renovations at Bellagio; renovations are said to have increased ADR for the completed rooms by $30. A $160 million room remodel at MGM Grand is also underway, which the company expects will drive ADRs north by $10 to $20. MGM continues to support the federal legislation to legalize online poker in the U.S. Recently, the company announced an agreement with bwin.party and Boyd Gaming to offer online poker in the U.S. if the legislation is passed. The company notes that the partnership, which offers both scale and global brand names, will give it the best opportunity to capitalize on the online poker market.
  • Ameristar Casinos (ASCA) - Net revenues for Ameristar Casinos increased 1.6 percent in the third quarter of 2011 to $304.5 million. The company also reported an adjusted EBITDA of $9.1 million for the quarter, representing a year-over-year increase of 11.2 percent. Ameristar notes that this is the fourth consecutive quarter that the company has had year-over-year improvement in both net revenues and adjusted EBITDA. Casino revenues remained essentially unchanged in the third quarter of 2011, decreasing 0.5 percent to $312.6 million. Meanwhile, food and beverage revenue increased 1.0 percent, while room revenue decreased 2.4 percent. Ameristar's Jackpot properties in Nevada reported net revenues of $15.8 million during the third quarter of 2011, representing a 2.4-percent decline compared to last year. Meanwhile, the properties reported adjusted EBITDA of $4.9 million, down 6.5 percent year-over-year.
  • International Game Technology (IGT) - International Game Technology reported net revenues of $539.8 million for the company's fourth quarter of 2011, representing a 13.8-percent increase when compared to the same quarter last year. The company notes that the improvement was primarily attributable to increases in North America product sales and International gaming operations. Gaming operations revenue increased 8.5 percent to $283.0 million in the fourth quarter, due to improved WAP performance, growth in the International install base and increased interactive revenue attributable to the acquisition of Entraction Holding AB. The company's gaming operations installed base increased 1,000 units over the prior year to 53,900 units, wholly attributable to additions in International operations. In terms of product sales, IGT reported a 20.4-percent increase in net revenues, primarily due to a 115.1-percent increase in North American machine sales from $46.9 million to $100.9 million. The company recognized 11,300 units, up 3,100 over last year, attributable to an increase in North American replacements. Domestic average selling price remained flat at $14,200 due to fluctuations in product mix, while International average selling price increased 4.3 percent to $16,900, due to favorable foreign exchange rates.
  • WMS Industries (WMS) - Net revenues for WMS Gaming declined 17.0 percent in the company's first quarter of 2012, falling from $187.5 million to $155.6 million. Product sales revenues declined 21.7 percent from $111.2 million to $87.1 million, attributable to a 26.3-percent decline in new unit sales revenue and a 3.9-percent decline in other product sales revenue. Global new unit shipments totaled 3,918 for the quarter, down 1,420 units when compared to the same quarter last year. New units shipped to the U.S. and Canada totaled 2,530 units, of which 1,600 units were replacements. Meanwhile, WMS shipped 1,388 units to International customers. Average sales price per new unit remained relatively flat in the first quarter of 2012 at $16,574. Gaming operations revenues declined 10.2 percent during the quarter to $68.5 million, due to a 13.2-percent decline in participation revenues. Other gaming operations revenues increased 52.9 percent to $5.2 million, due to new online and network gaming revenues.

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November 2011

Third Quarter Earnings Reports Provide Investors With Additional Insight

Volatility within the gaming sector continued during October 2011 as in the broader markets. Generally, gaming stocks moved into positive territory during the second half of the month, but the gains were not enough to offset losses that began in the prior month. Several operators' stocks, when computed on a weighted average basis for the entire month, remained down compared to September, particularly Wynn Resorts, Ltd. (WYNN), which began October in the $110-per-share range and ended the month at $133 per share (WYNN had traded in excess of $150 per share during the first half of September). Earnings reports by Wynn Resorts (WYNN) and others shed additional light on an otherwise uncertain operating environment. Surges in demand from destinations abroad, diversified operations and continued cost cutting measures by most major players helped sustain earnings during the third quarter. By the close of October 2011, the Applied Analysis Gaming Index (AAGI) declined 8.4 percent (down 43.01 points) to a composite score of 470.57 points. Compared to the same period of the prior year, the AAGI remained up 19.1 percent. The broader market (S&P 500 when computed on a similar basis) was up 2.8 percent month-to-month and 3.0 percent on an annual basis.

Selected earnings reports were released during the month of October 2011, which provided additional insight into recent performances within the sector.

  • Wynn Resort, Ltd. (WYNN) - Wynn Resorts reported net revenues of $1.3 billion in the third quarter of 2011, up 30 percent over the $1.0 billion reported in the third quarter of 2010. The dramatic increase is primarily attributable to a 41.7-percent increase in net revenues at Wynn Macau, or from $671.4 million in 2010 to $951.4 million in 2011. Overall, the company reported adjusted property EBITDA of $381.1 million in the third quarter, up 38.8 percent when compared to the same period last year. In Las Vegas, net revenues increased 3.7 percent to $346.9 million, while adjusted property EBITDA increased 11.3 percent to $85.1 million. Casino revenues in Las Vegas were $126.9 million in the third quarter of 2011, representing an 8.3-percent decline when compared to the same period last year. The company notes that the decline is primarily due to a lower baccarat hold percentage. Also in Las Vegas, non-casino revenues totaled $265.9 million, up 11.1 percent over last year. Room revenues were up 18.7 percent, while RevPAR (revenue per available room) was up 14.9 percent, attributable to a 14.2-percent increase in ADR (average daily room rate) to $240 and a 0.5-point increase in occupancy to 88.3 percent.
  • Boyd Gaming (BYD) - Boyd Gaming reported net revenues of $590.2 million for the third quarter of 2011, down a modest 0.7 percent when compared to the same period last year. Meanwhile, adjusted EBITDA increased 5.8 percent, or from $115.4 million in 2010 to $122.0 million in 2011. Boyd Gaming's wholly-owned operations reported adjusted EBITDA growth of 17.5 percent, which the company attributes to its diversified portfolio, exceptional customer experience and tight control on costs. Net revenues for the Las Vegas Locals market were $145.9 million in the third quarter, up a modest 0.2 percent compared to last year. Meanwhile, adjusted EBITDA was $30.8 million, representing a 17.9-percent increase over last year and the second consecutive quarter of year-over-year growth. The company notes that three of the four major properties in the Las Vegas region reported gains during the quarter, led by The Orleans, which reported an EBITDA increase of 28 percent. The Downtown Las Vegas market reported net revenues of $53.3 million for the third quarter of 2011, up 2.8 percent over last year. Adjusted EBITDA increased 5.7 percent to $6.0 million. BYD notes that results in its Downtown segment continue to be impacted by higher fuel costs associated with its Hawaiian charter service. However, the company's upgrade to a Boeing 767 has allowed it to transport an additional 6,000 customers per year.
  • Penn National (PENN) - Penn National reported net revenues of $710.9 million in the third quarter of 2011, an increase of 11.4 percent over last year. Meanwhile, adjusted EBITDA increased 27.2 percent to $206.1 million. The company notes that 14 of its 15 gaming properties reported year-over-year improvements in adjusted EBITDA margins, while 12 of the 15 reported increases in adjusted EBITDA. Beginning in the third quarter of 2011, Penn National will no longer report results by property, but rather by region. M Resort is included in the East/West region, along with five other properties. The region reported net revenues of $350.3 million in the third quarter, up 28.2 percent over last year. Meanwhile, the region reported adjusted EBITDA of $93.8 million, up 25.5 percent compared to 2010. Company-wide, gaming revenues for Penn National rose 9.3 percent compared to the prior year quarter to $636.4 million. Food, beverage and other revenue was reported at $109.7 million, up 27.9 percent year-over-year.
  • Bally Technologies (BYI) - Bally Technologies reported net revenues of $195 million during the first quarter of the company's fiscal year 2012, representing an increase of 14 percent over the same period last year. Adjusted EBITDA increased a modest 2 percent over last year to $59 million. The company notes that it has made numerous investments in innovation and new market expansions over the past few years, and these investments are now starting to pay off. Gaming equipment revenues increased 26 percent to $64 million during the first quarter of 2012, attributable to higher unit sales and a 6-percent increase in average selling price. Gaming operations revenues reached a quarterly record of $85 million during the first quarter, up more than 7 percent year-over-year. Finally, systems revenues increased 12 percent to $46 million, attributable to increases in software and services and maintenance revenues.
  • Las Vegas Sands (LVS) - Net revenues for Las Vegas Sands reached a record $2.41 billion in the third quarter of 2011, which is a 26.2-percent increase over the prior year quarter. Adjusted property EBITDA increased 43.2 percent to $924.1 million. The company's results are attributable to strong performances at its properties in Singapore (record adjusted EBITDA of $413.9 million and an EBITDA margin of 52.2 percent), Macau (adjusted EBITDA of $388.3 million and an EBITDA margin of 33.3 percent) and Las Vegas. In Las Vegas, The Venetian and The Palazzo reported net revenues of $347.4 million during the third quarter of 2011, up 19.5 percent over the same period last year. Casino revenues were $124.3 million, representing a 6.6-percent increase when compared to the same period of 2010. Non-gaming revenue sources reported increases as well. Room revenues were up 8.0 percent, attributable to a 9.8-percent increase in ADR and an occupancy rate of 92.7 percent. Meanwhile, food and beverage revenues were up 21.2 percent and retail and other revenues were up 16.1 percent year-over-year. The company's Las Vegas properties reported adjusted EBITDA of $94.3 million, representing a 61.7-percent increase. The company notes it benefitted from stronger group meeting and convention business during the third quarter.

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September 2011

Choppy Gaming Stock Performances Continue Through September

The gaming sector continues to experience a choppy trend line as broader economic concerns persist. Within the month of September 2011, the sector witnessed seesaw action, welcoming increased investor demand through the first half of the month for selected gaming operators, while late-month declines prevailed. Downturns overshadowed gains for most players in the Applied Analysis Gaming Index (AAGI) as daily average stock prices dipped for 8 out of 10 contributors. Despite the late-month nosedive, Las Vegas Sands (LVS) and Wynn Resorts (WYNN) posted month-to-month increases when factoring in the full month's activity.

Concerns about economic pullback in China late in the month drove stock prices south for the major players with interests in Macau, including LVS, WYNN and MGM. The uneasiness that emerged toward the end of September followed a report earlier in the month demonstrating that August gaming revenues in Macau rose 57 percent from the prior year. Revenues during that month were approximately $3.1 billion (USD), reflecting the depth of the Chinese gaming market. To put these figures into perspective, the latest monthly revenue total out of Macau represents approximately 6 months' worth of gaming revenue generated on the Las Vegas Strip.

Also during the month, Wynn Resorts (WYNN) agreed to terms with the Macau government to develop 51 acres of land in the Catai area of Macau. The deal allows for the company to develop a resort containing a five-star hotel, gaming areas, retail, entertainment, food and beverage, spa and convention offerings on the land. The deal structure includes an initial 25-year land lease with a cost premium of approximately $193.4 million and future annual rents payments of $771,700 (during development) and $1.1 million (during operations). Rent adjustments are expected every five years.

The AAGI rose 2.9 percent during September 2011, primarily fueled by early-month gains reported by Las Vegas Sands (LVS) and Wynn Resorts (WYNN) despite late-month fall-off. All other components of the AAGI dipped in the month. The broader equities markets were down as the S&P 500 (when computed on a similar basis) posted a 1.0-percent loss during the same month. Compared to the prior year, the gaming sector remains well ahead (+43.0 percent), while the broader market is up a more modest 4.6 percent year-over-year.

Selected economic and industry performance measures released during the month included the following:

  • Nevada Gross Gaming Revenue - The Nevada Gaming Control Board reported gross gaming revenue for Clark County of $715.5 million in July 2011, representing a 3.2-percent increase over the same month of the prior year. The Downtown, North Las Vegas and Las Vegas Strip submarkets reported increases as well, rising 10.2 percent, 10.1 percent and 1.6 percent, respectively. Slot revenues for Clark County casinos increased 4.2 percent to $430.8 million in July. Meanwhile, slot revenues for Downtown and North Las Vegas increased a significant 13.5 percent and 11.2 percent, respectively, while the Las Vegas Strip reported an increase of 3.0 percent. Clark County game and table revenue was up 1.7 percent during the month, while the North Las Vegas, Downtown and Las Vegas Strip markets all reported modest gains of 2.1 percent, 1.5 percent and 0.3 percent, respectively.
  • Las Vegas Visitor Statistics - According to the Las Vegas Convention and Visitors Authority, 3.5 million people visited Las Vegas in July 2011, up 4.3 percent from July 2010. Citywide occupancy increased by 4.3 percentage points, from 84.0 percent to 88.3 percent, while average daily room rates increased 9.9 percent, from $90.38 to $99.30. July marks the twenty-second consecutive month during which simultaneous increases in visitor volume and average daily room rates were reported. Meanwhile, although the number of conventions and meetings held increased 30.2 percent in July, convention attendance decreased by 17.9 percent to 263,000. Also, daily auto traffic on Interstate 15 at the Nevada and California border increased by a modest 0.7 percent.
  • McCarran International Airport Passenger Counts - McCarran International Airport reported 3.6 million passengers in August 2011 (latest available data), up 4.0 percent over the 3.5 million reported in August 2010. Year-to-date (January to August 2011), the airport has reported 27.7 million passengers, up 3.9 percent when compared to the same time period in 2010. Southwest Airlines continued to take the lead in terms of number of passengers, with the total reaching 1.4 million in August, up a modest 0.9 percent over last year. Delta Airlines, US Airways and American Airlines followed Southwest Airlines with 339,000, 217,000 and 216,000 passengers, respectively. Compared to last year, US Airways and American Airlines reported increases in passenger volumes of 15.5 percent and 7.4 percent, respectively. However, Delta Airlines reported a decline of 6.0 percent.
  • Nevada Taxicab Metrics - The Nevada Taxicab Authority reported 2.3 million taxicab trips in August 2011, up 5.2 percent over the same month of the prior year. Meanwhile, revenue totaled $32.1 million, representing a 12.2-percent increase from the $28.6 million reported last year. All other key indicators reported increases as well during the month of August. Most significant were average revenue per medallion and average revenue per shift, reporting increases of 11.8 percent and 11.6 percent, respectively. Average revenue per trip, average trips per medallion and average trips per shift reported gains of 6.7 percent, 4.8 percent and 4.6 percent, respectively. Taxicab owners and operators are expected to continue to report gains as long as visitor volume maintains the growth it has witnessed for more than a year.
  • National Consumer Confidence - According to The Conference Board, consumer confidence levels remained relatively flat during September 2011 (latest available data) following a sharp decline in August 2011. The Consumer Confidence Index reported a preliminary value of 45.4 in September, which was up modestly from the 45.2 posted one month prior. Generally, consumers believe their present situation has worsened slightly (score moved from 34.3 to 32.5) while their future expectations increased slightly (from 52.4 to 54.0). Consumer expectations regarding the job situation were slightly less pessimistic, yet they expressed greater concern about expected earnings. Overall confidence levels are below those reported one year ago (45.4 vs. 48.6) and remain well below the 12 month peak of 72.0 reported in February 2011. While not reported in September, August's measure of consumers' intent to vacation (next 6 months) edged up to 46.9 percent (from 42.0 percent in mid-2011).

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September 2011

Broader Market Movements Hammer Gaming Sector Stocks in August

Gaming stocks during the month of August continued the seesaw movements experienced across the broader equities markets. While most of the downturns experienced during the month were driven by fear and anxiety sourced to economic uncertainty and the possible impacts on travel and leisure decisions, selected gaming operators and equipment manufacturers released earnings early in the month. For some speculators, the results did not impress, contributing further to an already weak investment environment.

By the close of August, the Applied Analysis Gaming Index (AAGI) reached a value of 499.10 points, which reflected a 31.49-point decline (-5.9 percent) from the preceding month (July 2011). The downturn gave back nearly one-half of the 12.7-percent jump reported in the prior month. While volatility has prevailed in recent weeks and months, valuations generally remain ahead of where they stood one year ago. The AAGI remains up 42.9 percent during the past 12 months as international operators have been a key driver of the rise, including Las Vegas Sands (LVS) and Wynn Resorts, Ltd. (WYNN). Penn National Gaming, Inc. (PENN) also remains on the list of operators that have outperformed in the past year.

Somewhat surprisingly, the broader market (S&P 500 when computed on a similar basis) was harder hit during the past month. Typically, the gaming sector swings wider than the broader market as sector demand is sourced to discretionary spending, a fragile commodity in times of extreme uncertainty. International demand has helped diversify the revenue stream in recent months and years. The S&P 500 posted a 10.6-percent drop (compared the AAGI decline of 5.9 percent) on a month-to-month basis, while on a year-over-year basis the S&P was up a more modest 9.0 percent when compared to the AAGI (+42.9 percent).

Much of the international gaming expansion has been sourced to Las Vegas Sands (LVS), which announced that it would be paying a dividend of $2.50 per share on its outstanding 10-percent Series A Cumulative Perpetual Preferred Stock. In addition, the company's Board of Directors approved the redemption of all of its outstanding shares of the Series A Preferred Stock, which is expected to generate annual savings of approximately $76 million in dividend payments (redemption expected on November 15, 2011). The buyback is also expected to eliminate the most expensive obligation on the company's balance sheet.

Selected earnings reports released early in the month included the following:

  • MGM Resorts International (MGM) - Consolidated net revenues for MGM Resorts International (MGM) were up 17.0 percent in the second quarter of 2011 to $1.8 billion, while adjusted property EBITDA for all properties and subsidiaries was up 47.1 percent to $410.7 million when compared to the same quarter of last year. The company's results are attributable to strong performances by its Macau and Las Vegas properties, as well as the fact that the current period includes net revenue related to MGM China ($193 million) following the company's acquisition of a controlling interest in MGM China during the quarter. The company's wholly-owned Las Vegas Strip resorts (excludes CityCenter) reported net revenues of $1.2 billion and adjusted EBITDA of $271.0 million, which translates into increases of 5.0 percent and 11.2 percent, respectively. Hotel occupancy was up 1.0 percentage point in the quarter for wholly-owned Strip resorts, while average daily rate increased 9.6 percent to $126, resulting in a 10.7-percent increase in RevPAR (revenue per available room). Aria, the only gaming property within the 50 percent-owned CityCenter, reported record net revenues of $233.0 million in the second quarter of 2011, an improvement of 48.2 percent compared to last year. Occupancy at the property was 90.0 percent, and the average daily rate was $202, resulting in a 28.0-percent increase in RevPAR to $181.
  • Pinnacle Entertainment (PNK) - Pinnacle Entertainment (PNK) reported net revenues of $299.1 million in the second quarter of 2011, representing a 9.3-percent increase over last year. Adjusted EBITDA increased 39.9 percent to $69.1 million, which is a record for the company. Pinnacle attributes the strong quarter to its industry-unique revenue growth strategies and the company's commitment to offer quality entertainment experiences and enhance guest relationships. The company reported the most significant increase in its retail and entertainment revenue, which was up 38.5 percent to $13.1 million. Meanwhile, Pinnacle's food and beverage, gaming and room revenues were up 10.8 percent, 8.4 percent and 1.6 percent, respectively. The company will soon be expanding its operations to Southeast Asia due to its recent investment in Asian Coast Development.
  • WMS Industries (WMS) - WMS reported net revenues of $203.2 million in its fiscal fourth quarter of 2011, representing a 4.8-percent decrease from the $213.4 million reported in the same period last year. The company notes that total revenue for the quarter was less than anticipated due to lower product sales revenues. Adjusted EBITDA also declined in the latest quarter, falling 19.7 percent from $81.2 million to $65.2 million. Total product sales revenues increased by $10.4 million on a quarterly sequential basis, but declined 3 percent when compared to last year. Meanwhile, the average sales price for new units increased 9 percent over last year, due to a higher mix of premium products. WMS also noted that it will be refining product plans and restructuring its organization in order to emphasize its content and product development strengths. As a result, the company is reducing organizational staffing by about 10 percent and postponing or cancelling some of its long-term projects. WMS believes this strategy will better direct resources and facilitate focus on near-term revenue opportunities.
  • Bally Technologies, Inc. (BYI) - Bally Technologies (BYI) reported net revenues of $214 million in its fiscal fourth quarter of 2011, up 9 percent from last year. Each of the major revenue categories reported increases, with two of the three, gaming operations and systems, posting record results. Gaming operations revenue increased 6.5 percent to a record $82 million, attributable to the company's placement of new premium games. Meanwhile, systems revenues increased 9.3 percent to a record $59 million, due to an increase in hardware revenues and a record $17 million in maintenance revenues. The third revenue category, gaming equipment, totaled $73 million, up 14.1 percent over last year. The average selling price of new gaming devices increased 9 percent to a record $16,719 per unit, due to a higher quality product mix.

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August 2011

Gaming Stocks Press Forward in July

During the month of July 2011, the gaming sector generated a level of investor interest that hasn't been witnessed in months. Stronger than expected gaming and tourism metrics were reported for the Las Vegas market, while selected second quarter earnings reports provided additional insight into various global jurisdictions. Daily average stock prices increased for all components of the Applied Analysis Gaming Index (AAGI) for the period, barring WMS Industries (WMS). The upward pressure on prices began to subside only in the final days of the month under looming federal debt ceiling concerns and uncertainty in broader national economic conditions.

By the close of July 2011, the AAGI reported a composite score of 531.17, which represented a 12.9-percent bounce from the preceding month (June 2011) and a substantial 60.4-percent jump from the same month of the prior year. The latest valuations reflect levels not reported since February 2008, nearly three-and-a-half years ago. The climb into positive territory far outpaced movements in the broader markets. The S&P 500 edged up 3.1 percent month-to-month and remains up 22.9 percent year-over-year.

Selected earnings reports released during the month included the following:

  • Las Vegas Sands (LVS) - The diversified gaming operations of Las Vegas Sands (LVS) demonstrated strength through the second quarter of 2011 with net revenues climbing to $2.35 billion (+47.1 percent) during the quarter and consolidated adjusted property EBITDA nearly doubling to $901.6 million (+90.4 percent). The overall property EBITDA margin was also fairly impressive at 38.4 percent. Results were driven by huge cash flow from Marina Bay Sands in Singapore ($405.4 million on a margin of 55.0 percent). The company's Macao operations also contributed $391.6 million in EBITDA (+27.5 percent) on a margin of 33.0 percent. In Las Vegas, net revenues were up 18.2 percent despite reduced hotel revenues (-6.1 percent). Hotel occupancies at the Venetian/Palazzo campus slipped to 88.0 percent (-900 bps) while the average daily room rate improved to $200 (+4.2 percent) resulting in a revenue per available room (RevPAR) decline of 5.3 percent to $177. Property EBITDA in Vegas improved 40.8 percent to $92.9 million on a margin of 27.9 percent.
  • Wynn Resort, Ltd. (WYNN) - Notwithstanding Chairman and Chief Executive Officer Steve Wynn's commentary regarding President Obama's economic policies, Wynn Resorts (WYNN) posted substantial gains in top line revenues and profitability during the second quarter of 2011. The latest quarterly performance not only surpassed analysts' expectations, but the gains were sourced to both its Las Vegas and Macau operations, a trend not witnessed in recent years. Wynn Resorts reported net revenues of nearly $1.4 billion in the second quarter of 2011, a 32.4 percent improvement over the $1.0 billion reported in the second quarter of 2010. Net revenues in Las Vegas were up 22.8 percent in the second quarter, while adjusted EBITDA was up 103.7 percent. Although room occupancy fell 3.4 percentage points when compared to the second quarter of 2010, room revenues were up 15.5 percent during the quarter, due to a 22.1-percent increase in average daily rate. All non-casino areas witnessed increases, including entertainment revenues that jumped primarily due to the Garth Brooks shows during the period. Wynn noted the company continues to benefit from international travelers, approximately 75 percent of which originate from China. Wynn Macau reported a 36.7-percent increase in net revenues and a 45.4-percent increase in adjusted EBITDA in the second quarter of 2011. Wynn Resorts also announced a cash dividend of $0.50 per common share.
  • Boyd Gaming Corporation (BYD) - Boyd Gaming (BYD) posted stabilization within their business during the second quarter as revenues remained relatively flat (down less than one percent) and EBITDA rose to $118.4 million (+4.3 percent) from the prior year. The company continues to cite positive trends, including the fact that the pace of decline has slowed and selected properties are demonstrating momentum heading into the back half of 2011. Boyd's exposure to a diverse set of U.S. locations affected overall results, with the company's Tunica property being closed for nearly the entire month of May due to flooding on the Mississippi River. Boyd reported challenging conditions in Atlantic City as the market begins to experience increased competition from surrounding markets, particularly in Pennsylvania. In Las Vegas, the locals' market returned to year-over-year growth in profitability during the quarter, which was assisted by improvements in the convention and meeting business.
  • International Game Technology (IGT) - The gaming manufacturer released results for its third quarter of fiscal year 2011 during the month, reporting growth in total revenues to $489 million (+3.0 percent) and a 17.2-percent increase in operating income to $141 million due to higher revenues, lower cost of sales and flat operating expenses. Net income declined 5.6 percent to $86.9 due to higher income tax provisions reported in the current year quarter. The company closed on its acquisition of Entraction Holding AB during the period, which is expected to enhance IGT's online gaming portfolio in legalized jurisdictions by adding poker, sports betting and bingo offerings.

In addition to selected gaming company earnings reports, southern Nevada industry indicators released during the month pointed in a positive direction. According to the Nevada Gaming Control Board, total gaming revenue for Clark County casinos increased 19.4 percent in May 2011 when compared with the same month last year. The Las Vegas Strip market reported the largest monthly gain compared to the prior year (+28.9 percent), primarily driven by high-end gaming play. Total slot revenue increased 7.8 percent county-wide, while game and table revenues rose 40.2 percent assisted by strong growth in baccarat revenues. Special events during the month helped boost overall demand. Additionally, the Las Vegas Convention and Visitors Authority reported that May 2011 signaled the 15th consecutive month of increased average daily room rates (+9.7 percent) and visitor volume (+3.3 percent). City-wide occupancy rose 3.5 points year-over-year to 86.1 percent. Additionally, the latest data from McCarran International Airport indicated passenger counts in June 2011 were up 5.6 percent compared to the same month last year.

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July 2011

Gaming Companies' Stock Prices Trend Down During June

Gaming stocks retreated during June 2011 as prospects about broader domestic economic improvements remain somewhat uncertain and international markets continue to face challenges of their own. The latest movement in the Applied Analysis Gaming Index (AAGI) resulted in a composite score of 470.60 as of the close of June, a 4.6-percent dip from the preceding month (May 2011). However, the gaming sector remains up a respectable 40.7 percent compared to the same time one year ago. Stock prices have yet to reach back to pre-bust levels reported in the late-2007 timeframe when the AAGI peaked at 667.09 in October 2007. For comparison purposes, the broader markets were down a more modest 3.8 percent during the last month and up 18.8 percent year-over-year.

The latest reporting period included a somewhat dismal industry report from Moody's for selected operators. The doom-and-gloom connotations are generally directed at leveraged operators and those with fairly sizable operations in the Las Vegas market. MGM Resorts International (MGM) and Caesars Entertainment appeared to be hardest hit in the report given debt loads, timing of maturities and other factors. On the other hand, operators with a more diverse portfolio, including Las Vegas Sands (LVS) and Wynn Resorts, Ltd. (WYNN), appeared to benefit from investments (and presumably returns) in international locations. Steve Wynn recently commented about his interest in developing a property in the thriving Singapore market which has limited gaming alternatives, one of which is Marina Bay Sands owned and operated by rival Las Vegas Sands (LVS).

By the close of June, national consumer confidence levels continued to wane. The Conference Board, producers of the Consumer Confidence Index, indicated that assessments of the economy fell for the second consecutive month. The index score reached 58.5 points, down from 61.7 in May. Gauges of consumers' present and future situations also worsened as pessimism about near-term expectations prevailed. Business and labor conditions scored negatively in the latest report, which were partially attributable to income concerns, job-related factors and general business conditions. Overall, consumer confidence levels reached their lowest point since November of last year. Additionally, approximately 41.8 percent of consumers intend to vacation within the next 6 months. This metric has continued to trend south since a cycle high of 51.1 percent in December 2010.

Also during the month, MGM Resorts International (MGM) completed its initial public offering of MGM China, which resulted in approximately US$1.4 billion in net proceeds. The transaction also allowed MGM to acquire additional ownership with the company's stake representing approximately 51 percent of the stock.

Selected economic and industry indicators released during the month included the following:

  • Gaming Revenue Metrics - According to statistics released by the Nevada Gaming Control Board, Clark County reported gross gaming revenues of $682.9 million in April 2011 (latest available data), representing a 1.0-percent decline from April 2010. Gaming revenues for the Las Vegas Strip showed a year-over-year decline of 2.2 percent, falling from $437.3 million to $427.5 million. Non-restricted gambling establishments located within the Downtown Las Vegas and North Las Vegas market areas experienced the largest aggregate declines year-over-year, falling 5.6 percent and 7.9 percent, respectively. Clark County reported a 3.2-percent drop year-over-year in slot machine revenue in April 2011, while the Las Vegas Strip, Downtown Las Vegas and North Las Vegas markets fell 4.3 percent, 9.4 percent, and 11.8 percent, respectively. Meanwhile, in terms of game and table revenue, county-wide revenue was up 2.9 percent year-over-year. The Las Vegas Strip, Downtown Las Vegas and North Las Vegas markets showed increases of 0.1 percent, 6.1 percent, and 22.8 percent, respectively, with North Las Vegas reporting only a 2.6-percent increase in drop but a higher-than-average win percentage of 15.7 percent. As Las Vegas visitor volume and average daily room rates continue to trend upwards, it remains to be seen if and when gaming revenues will begin to track similarly.
  • Las Vegas Visitor Metrics - The Las Vegas Convention and Visitors Authority reported 3.4 million visitors to Las Vegas during the month of April 2011 (latest available data), representing a 4.8-percent increase compared to the same month last year. Convention attendance reached 435,934, a 2.2-percent increase from April 2010. In addition, enplaning and deplaning passengers at McCarran International Airport were up 2.3 percent year-over-year, totaling 3.5 million during the month of April. Meanwhile, average daily auto traffic on Interstate 15 at the Nevada/California border during the month showed an increase of 3.4 percent. Las Vegas hotel occupancy levels and room rates showed significant improvement as a result of increased visitor volume. Citywide hotel and motel occupancy during April was up 3.7 percentage points year-over-year, or from 84.0 percent to 87.7 percent. The average daily room rate was recorded at $105.67, a 9.1-percent increase from the $96.87 reported in April 2010. Continued improvements in both occupancy and average daily room rates should result in substantial increases in room revenue for local operators.
  • McCarran International Airport - The Clark County Department of Aviation reported that May 2011 passenger traffic at McCarran International Airport was up 5.1 percent compared to the same month in the prior year. Year-to-date, McCarran has welcomed over 16.7 million travelers, which is a 3.4-percent increase compared to the 16.2 million passengers reported during the same period one year ago. Southwest Airlines remained McCarran's top air carrier in terms of passenger traffic, serving over 1.3 million people in May 2011 (down 4.2 percent year-over-year). Additionally, on a year-over-year basis, American Airlines, Delta, and US Airways reported an increase in passengers of 10.1 percent, 0.7 percent, and 17.1 percent, respectively.

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April 2011

Stock Prices for Gamers Rebound as Quarterly Earnings Reports Roll Out

The majority of gaming operators and equipment manufacturers comprising the Applied Analysis Gaming Index (AAGI) posted positive performances during the latest reporting period following a month of aggregate decline in March 2011. By the close of April 2011, the AAGI reported a composite score of 485.92 points, which represented a 9.3-percent gain from the preceding month (March) and a more substantial rise (+42.1 percent) from the same month of the prior year. Double-digit stock price gains by two Macau operators (WYNN and LVS) boosted the monthly index. The latest gaming sector activity outpaced the broader market as the S&P 500 (when computed on a similar basis) rose a more modest 2.1 percent during the past month and 11.2 percent over the prior year.

Earnings report season began in April as selected operators and equipment makers released first quarter earnings statements. Despite somewhat mixed performances in April, expectations for gaming operators that have yet to release earnings remain high. Wynn Resorts, Ltd. posted impressive revenue gains across the board as its Macau operations jumped by 46.6 percent and its Vegas operations climbed 24.0 percent. Adjusted property EBITDA for the multi-locational operator surged from $241.9 million to $405.0 million (+67.4 percent) - Macau EBITDA jumped 50.2 percent and Vegas EBTIDA was up 119.1 percent. It is worth noting the Macau results include the addition of 414 rooms and villas with the opening of Encore on April 21, 2010. In Las Vegas, revenue per available room (RevPAR) improved from $181 to $211 (+16.6 percent) while table games win percent exceeded 30 percent during quarter (well above expectation and the prior year) primarily sourced to a successful Chinese New Year.

International Gaming Technology (IGT) reported fiscal 2011 second quarter results during the month. Total revenue increased 1.1 percent, or from $486.8 million in the prior year quarter to $492.3 million. The company reported a 3.9-percent increase in product sales, mainly sourced to an increase in unit sales in North America compared to the prior year. Sequentially, North America unit sales grew 12 percent, while international unit sales grew 5 percent (compared to the immediately preceding quarter). In its earnings release, IGT increased fiscal year 2011 guidance for adjusted earnings from continuing operations to a range of $0.84 to $0.90 per share, which was consistent with analyst expectations. Late in the month, the company announced it had entered into an exclusive agreement to supply several thousand video lottery terminals to an operator in the Caribbean and Latin America.

Gaming manufacturer WMS Industries (WMS) reported preliminary fiscal 2011 third quarter results in early April that were confirmed later in the month. Quarterly revenues declined 2.4 percent compared to the prior year quarter, or from $197.5 million to $192.7 million. The company attributed the decline primarily to a 3.0-percent reduction in product sales revenues, which was reflective of lower-than-expected global new unit demand. Management also noted that certain unit shipments expected to be fulfilled during the quarter were delayed to the subsequent quarter, while other products experienced delays in the commercialization process. Fewer new major casino openings and continued constrained capital expenditures by the company's customers contributed to the challenging quarter. The company's stock nosedived immediately after management's release and commentary but gained some ground back in the second half of the month.

While pending its first quarter results (due out on May 4, 2011), MGM Resorts International (MGM) made a few announcements during the month that may play a role for the international hospitality company going forward. In mid-April 2011, MGM entered into agreements with Ms. Pansy Ho that will allow for the company to obtain 51-percent ownership and management control of MGM China upon consummation of its initial public offering. MGM announced late in the month that the Hong Kong Stock Exchange has issued a comment letter as part of its ongoing review process. While these types of inquiries are not uncommon, MGM is required to furnish additional information which may or may not impact the viability and/or timing of the Macau IPO. Unrelated and also during the month, MGM Resorts announced the resignation of Kirk Kerkorian from full-time board responsibilities; he has been named Director Emeritus. Kerkorian is expected to continue as a senior advisor to the company, but his board voting rights will not be retained.

A few key indicators continue to suggest increased stability for the leisure sector is possible, particularly in Las Vegas - visitor volume data has been tracking positively while national consumer confidence levels have come off the floor. According to the latest data released by the Las Vegas Convention and Visitors Authority (LVCVA), visitor volume showed modest improvement over the prior year, contributing to 12 consecutive months of year-over-year increases. In February, Las Vegas greeted nearly 2.9 million visitors, an increase of 1.0 percent compared to the same month last year. While the increase is small compared to other recent months, this is the first time the month of February has reported an annual increase since 2008. While convention attendance remains down from the same period last year (-11.5 percent), visitor volume during the month was assisted with an increase in airport passengers (+2.4 percent) and auto traffic from the Nevada-California border (+1.4 percent). In conjunction with increases in visitor volume, the citywide average daily room rate continues to make small gains, reporting a 1.3-percent increase over the previous year, to an average rate of $98.49 per night. Improvements in the average daily room rate have been modest; yet, they have now risen on a year-over-year basis for 12 consecutive months. This suggests casino-hotels are beginning to look at retracting discounts witnessed during the latest recession, as visitor demand rises.

After facing a sharp decline in March 2011, the Conference Board's Consumer Confidence Index increased 1.6 points to 65.4 in April. Consumers' short-term outlook improved slightly as concerns about inflation lessened, resulting in an increase in the Expectations Index from 81.3 to 82.6. This suggests that consumers are becoming less uncertain than they were in the previous month. Meanwhile, consumers' feelings on current economic conditions improved for the seventh straight month, with an increase in the Present Situation Index from 37.5 to 39.6 in April. Consumers also had a slightly better view of the business market in the past month. There was a decline in the number of consumers who felt jobs were "hard to get" in the current market from 44.4 percent in March to 41.8 percent in April. In addition, 5.2 percent of consumers said jobs in the current market were "plentiful", which is a 0.6 percentage-point increase from the 4.6 percent who felt the same in March. However, there is still a bit of uncertainty about how much the labor market will improve in the next six months. While the number of consumers who felt there would be fewer jobs declined from 20.5 percent to 19.0 percent, those that thought there would be more job creation also declined from 19.6 percent to 17.5 percent.

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March 2011

Gaming Stock Prices Soften in March 2011

The Applied Analysis Gaming Index (AAGI) posted its first monthly decline of 2011 as investor demand softened in March, speculation about the impact of gas prices swirled, and regulatory requests to Las Vegas Sands (LVS) about business practices abroad surfaced. By the close of March 2011, the AAGI reached a composite value of 444.61, which represented a 2.1-pecent decline, or a 9.6-point drop. The latest monthly performance followed gains in the first two months of the year. Despite the modest stall, the gaming sector remains up 45.4 percent compared to the same month of the prior year. Broader equities markets (S&P 500) were down a more modest 1.3 percent month-to-month but have only risen 13.2 percent compared to the prior year.

As recessionary conditions give way to recovery, a number of factors are likely to play a role in overall timing. According to The Conference Board, consumers' intent to travel has started to climb north while overall consumer confidence levels continue to bounce around yet remain ahead of the prior year. A potential negative in the equation is fuel pricing. With gas prices approaching $4.00 per gallon in some areas, the elevated price at the pumps has a negligible impact on a single budgeted trip amount (less than 2 percent of the overall trip budget on a typical round trip from Los Angeles to Las Vegas). The main area of concern lies with the impact on consumers if prices remain elevated for an extended period of time (e.g., 6 months or more), reducing household discretionary dollars that could be used for leisure travel purposes. Rising oil prices may also contribute to airfare increases, which may be of greater concern in terms of the outlook on travel. While we have yet to see substantial increases for a sufficient period of time, they may play an important role over the long run for selected hotel-casino operators.

An online poker initiative in Nevada (Assembly Bill 258) contemplates authorization of internet poker play located within Nevada and the rest of the world, outside of the United States. If adopted, the approval may change the face, and financials, of major players within the industry. It is worth noting that Wynn Resorts, Ltd. (WYNN) announced a strategic relationship with PokerStars, the world's largest online poker business. The alliance suggests the two companies will work to secure the passage of federal legislation to regulate online play within the US and potentially develop a joint site - www.PokerStarsWynn.com.

The Fertitta brothers, who are owners in Stations Casinos and Ultimate Fighting Championship (UFC), along with other partners have also reportedly confirmed an alliance with Full Tilt Poker to target federal legalization of online poker. Additionally, Caesars Entertainment gained approval from the Nevada Gaming Commission to partner with 888 Holdings, a British online gaming outfit during the month.

With capital investments in new resorts likely to remain limited, particularly in the Las Vegas market, many gaming operators and hoteliers are seeking to leverage their existing assets and brands, rather than their balance sheets. Recently, MGM Resorts (MGM) announced a partnership with sbe, a hospitality and entertainment company, to allow cross-promotion by way of their respective customer loyalty programs. The arrangement between the companies provides an opportunity to expose their products to a potentially new consumer base. Another marketing alliance was formed between Pinnacle Entertainment (PNK) and Wynn Resorts, Ltd. (WYNN). The alliance would provide access to Wynn Las Vegas and Encore to high-end customers of Pinnacle, providing a broader experience for Pinnacle customers. The move is also timed with Pinnacle's re-launch of its customer loyalty program. Finally, another marketing arrangement that occurred last quarter carries little up-front cost. Las Vegas Sands' (LVS) inked a deal with InterContinental Hotels & Resorts (IHG) to allow reward point redemptions by IHG guests at LVS properties in Las Vegas. Selected economic indicators reported during the month included the following:

  • Nevada Gaming Revenue - Based on the latest data released by the Nevada Gaming Control Board, Clark County casinos reported revenues of $761.4 million during the first month of 2011, representing a marginal drop of 0.4 percent when compared to January 2010. Total Strip revenue fell 2.5 percent year-over-year to $482.7 million, while other major jurisdictions reported increases year-over-year including North Las Vegas (+13.2 percent), Boulder Strip (+10.9 percent) and Downtown Las Vegas (+8.4 percent). While selected segments reported single-digit declines in slot machine coin-in during the month, gaming operators within the Las Vegas Strip, Downtown, Boulder Strip and North Las Vegas experienced increasing slot hold percentages (up 0.9 percent points in aggregate). Overall in Clark County, slot machine gaming revenues were up 7.1 percent while game and table revenues declined by 11.8 percent.
  • Las Vegas Visitor Volume - The Las Vegas valley welcomed 3.2 million visitors during January 2011 (latest data), an increase of 8.6 percent compared to the same month last year, according to the Las Vegas Convention and Visitors Authority (LVCVA). Conventions and meetings brought in an estimated 615,900 visitors to the region, a 36.9-percent increase over January 2010. Hotels and motels reported healthy increases in average occupancy levels at 79.0 percent (+7.9 percentage points) while additional demand for rooms drove daily room rates up 7.5 percent, averaging $107.22 during the month. In addition, a larger share of visitors arrived by plane as McCarran Airport passenger counts increased by 5.0 percent year-over-year in January. Average daily vehicle traffic at the Nevada/California border (on Interstate 15) increased by a marginal 0.1 percent, suggesting a shift in consumer types.
  • McCarran International Passenger Volume - During the month of February (latest data released), McCarran International Airport welcomed 2.9 million enplaning and deplaning passengers through its gates, bringing the total number of passengers for the first two months of the year to 6.1 million. Compared to the same period of the prior year, February 2011 witnessed a 2.4-percent increase in passenger traffic. For the year, passenger volume is up a more significant 3.7 percent when compared to the 5.9 million travelers witnessed during the first two months of 2010. While the overall increase is positive news for the Las Vegas valley, a decline in McCarran passenger traffic sourced to a reduction in scheduled flights by United Airlines offset other gains; United transported 10.1 percent fewer passengers in February 2011. Southwest Airlines and American Airlines both reported increases in passenger count, adding 23,100 (+2.1%) and 4,100 (+2.5%) passengers, respectively, when compared to the same period of the prior year. Rising fuel prices and other potential flight schedule reductions remain an ongoing concern.

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February 2011

Earnings Report Season Provides Insight as Gaming Index Continues to Rise

During the month of February 2011, the gaming sector continued to report increased investor demand as the Applied Analysis Gaming Index (AAGI) edged north 3.1 percent, or 13.66 points, reaching a composite value of 454.16. Compared to the same month of the prior year the AAGI jumped 58.8 percent. While the latest monthly movement was on par with broader equities markets, including the S&P 500 that rose 3.0 percent during the same timeframe, on an annual basis the gaming sector far outpaced broader equities. During the past 12 months the S&P 500 climbed a respectable 21.3 percent, yet this was only a fraction of the 58.8-percent growth experienced by gamers. The latest monthly gain was driven by improvements of gaming operators (+17.29 points), while performances of gaming equipment manufacturers continued to trend in an opposite direction (-3.63 points). It is also worth noting the AAGI reached its highest value since the mid-2008 timeframe. Fourth quarter earnings reports released during the month provided increased visibility for both Las Vegas operations and international markets. The following highlights financial performance released during February.

  • Wynn Resorts (WYNN) - WYNN reported net revenue of $1.2 billion in the fourth quarter of 2010 compared to $0.8 billion in the same quarter last year, with strong results in both Macau and Las Vegas contributing to the increase. The current year results also include Encore at Wynn Macau, which opened April 1, 2010. Including the newly opened Encore, fourth quarter revenue and EBITDA were up 79.4 percent and 108.9 percent, respectively, in Macau. Average daily room rate (ADR) increased from $271 to $303 for the same period, and occupancy increased from 90.6 percent to 92.3 percent for the company's Macau operations. In Las Vegas, revenue and EBITDA were up 8.0 percent and 25.0 percent, respectively; ADR rose from $219 in the fourth quarter of 2009 to $235 in the latest quarter, while occupancy rose 0.8 percentage points to 81.8 percent. On the expansion front, the company hopes to begin groundwork on its planned third Macau resort in the Cotai area as early as March 2011. Chairman and chief executive officer Steve Wynn also said he has changed his mind about not investing in any more U.S. projects due to what he believed were uncertain and unfavorable fiscal conditions, but he did not announce any specific future projects.
  • Las Vegas Sands (LVS) - The latest quarterly results for international gaming operator LVS continued to break revenue and EBITDA records for the company as properties in Macau and Singapore turned in strong results once again. The company reported net revenue of $2.02 billion, a record for LVS and an increase of 56.9 percent compared to the $1.28 billion reported in the same quarter last year. In Singapore, the Marina Bay Sands, in its second full quarter of operations, again generated the highest quarterly adjusted property EBITDA ($305.8 million) and EBITDA margin (54.6 percent) from any single property in the history of the company. Due to strong demand for "MICE" (meetings, incentives, conventions and exhibitions) space in the Singapore complex, LVS has announced that it will bid for any additional land that the Singapore government puts up for auction that would be suitable for expansion. Also on the growth front, the company recently announced plans to build a $20-billion miniature Las Vegas Strip in either Madrid or Barcelona, Spain. However, materialization of "Euro Vegas" would require land concessions from the government and quick approval of building plans. Meanwhile, for the company's operations in Las Vegas, Nevada, net revenue was up 16.5 percent to $310.6 million for the quarter compared to last year due to increased sales in the food, beverage, and retail segments; adjusted property EBITDA rose 41.7 percent to $80.6 million and EBITDA margin increased 4.6 percentage points to 25.9 percent.
  • MGM Resorts International (MGM) - MGM narrowed its net loss in the final quarter of 2010 to $139.2 million or $0.29 per share, an improvement from a loss of $433.9 million or $0.98 per share in the same quarter last year. MGM Macau, which is 50 percent owned by the company, reported record results in terms of operating income during the quarter. Companywide, net revenue increased one percent to $1.5 billion for the fourth quarter of 2010 compared to the prior year quarter; excluding reimbursed costs mainly related to the company's management of CityCenter, net revenue decreased one percent. The company notes that it has made significant improvements in its balance sheet during the past year through capital raises and the extension of debt maturities at MGM Resorts, MGM Macau and CityCenter. In early 2011, the company rolled out its new customer loyalty program, M life, which allows guests to accumulate points not only on gambling but on total resort stay.
  • Caesars Entertainment - In its first quarterly earnings conference call in years, Caesars Entertainment (formerly Harrah's Entertainment) reported same store net revenue growth in the Las Vegas region of 0.9 percent in the fourth quarter of 2010 compared to the same quarter last year. Including Planet Hollywood, which was acquired in the first quarter of 2010, fourth quarter revenues increased 11.9 percent year-over-year for the company's nine Las Vegas region properties. Companywide, quarterly net revenues increased 1.0 percent to $2.1 billion and adjusted EBITDA rose 5.1 percent to $439.9 million. However, the company reported a net loss of $194.0 million for the latest quarter due to declining operating income and increased impairment charges, compared to net income of $298.3 million in the same quarter prior year. Caesars Entertainment remains a privately held company, but management indicated they would continue to monitor market opportunities as it relates to a potential public offering.

Industry news released during the month indicated that recovery in the sector, specifically in the Las Vegas market, will take time. In Clark County, gross gaming win declined 2.6 percent in December 2010 compared to the same month last year, according to data released by the Nevada Gaming Control Board. Establishments on the Las Vegas Strip, which comprise approximately 60 percent of statewide gaming win, reported monthly revenues only 0.3-percent below the prior year. For the entirety of calendar year 2010, gross gaming revenue county-wide is up approximately 0.8 percent year-over-year. Gaming win on the Las Vegas Strip is up 4.1 percent for the latest 12 months. Visitor statistics in Las Vegas fared slightly better, suggesting spend per visitor remains relatively weak. According to the Las Vegas Convention and Visitors Authority (LVCVA), visitor volume increased for the tenth consecutive month in December 2010. As room inventory held constant despite some fluctuation during the year, climbing visitor numbers positively impacted occupancy rates, which increased from 71.3 percent citywide in December 2009 to 72.4 percent in the latest month. Visitor volume is up 2.7 percent for the year as the region welcomed 37.3 million visitors compared to 36.4 million in the prior year. The average daily room rate for the entirety of 2010 was $94.91, up 2.0 percent from 2009. Also for the year, total air passengers declined 1.8 percent while average daily automobile traffic at the Nevada/California border on I-15 increased 2.6 percent.

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January 2011

Gaming Index Improves in Advance of Upcoming Earnings Reports

The first month of 2011 produced positive results overall within the gaming sector. The Applied Analysis Gaming Index (AAGI), a composite score of 10 gaming operators and gaming equipment manufacturers, pressed north as aggregate valuations increased from the final month of 2010, reaching a value of 440.50 (+5.9 percent). Compared to the same month of the prior year the AAGI remains up 47.7 percent. In contrast to a modest decline in December, the gaming sector outperformed the broader market during January 2011. The S&P 500 reported an increase of 3.3 percent during the past month and a healthy, yet more modest, 14.2 percent increase on a year-over-year basis. Gaming operators appear to be in greater demand as compared to equipment makers. The seven gaming operators included in the index generated a combined 6.0-percent (25.03 point) gain, which was marginally offset by a 0.1 percent (0.53 point) decline reported by the three gaming equipment manufacturers.

With limited data points released in the first month of 2011, there were a few items of note. MGM Resorts International (MGM) announced the completion of $2 billion in financing transactions at CityCenter Holdings, LLC. The transactions included the issuance of $900 million notes (7.625 percent senior secured first lien due 2016) and $600 million notes (10.75 percent senior secured second lien due 2017). MGM and its partner Infinity World Development Corp. also kicked in $77 million in total equity. Funding is expected to reduce outstanding debt on the company's credit facilities, start an escrow reserve fund and pay transaction fees. Maturities were also pushed out on other existing joint venture debt. The transactions also provide additional breathing room and flexibility as the market absorbs the various components of the CityCenter development.

From the manufacturer segment, International Game Technology (IGT) posted earnings for its first fiscal quarter of the year (fourth calendar quarter). The results included a 10-percent decline in total revenue, reaching $465 million. The decline in revenue was primarily sourced to fewer international openings and expansions compared to the prior year. Margins improved slightly as the company-wide gross margin was up 200 basis points to 59 percent and the game operations gross margin improved 100 basis points to 63 percent. In a separate release later in the month, IGT announced its casino management system was selected for the upcoming opening of the Gun Lake Casino in Michigan, which is being managed by Stations Casinos, Inc.

WMS Industries (WMS) also reported quarterly results, which included revenue of $199.9 million, a 6-percent increase sourced to a rise in product sales. The company shipped 6,310 units during the quarter with an 8-percent increase in average selling price to $16,620 per unit. The gross margin on product sales edged up 170 basis points (sequentially) to 50.4 percent. Total gaming operations revenues dipped 4.1 percent to $72.7 million. WMS upped its third quarter (fiscal year) revenue guidance by 6 to 9 percent and reiterated its fiscal 2011 annual revenue guidance of $830 to $850 million.

The coming month is expected to provide additional insight into the sector's performance as quarterly earnings reports for operators will start to roll out during the first week of February. Release dates already on the calendar include: Bally Technologies (BYI) on February 2nd; Penn National Gaming (PENN) on February 3rd; Las Vegas Sands (LVS) on February 3rd; Ameristar Casinos (ASCA) on February 9th; and MGM Resorts International (MGM) on February 14th. Companies that have yet to announce their release dates include Wynn Resorts, Ltd. (WYNN), Boyd Gaming (BYD) and Pinnacle Entertainment (PNK). Selected economic indicators reported during the month included the following:

  • Nevada Gaming Revenues - After three months of year-over-year increases, Clark County gross gaming revenues declined by 4.7 percent in November. According to the latest report released by the Nevada Gaming Control Board, Las Vegas Strip properties demonstrated similar results with revenues falling 4.1 percent. Within the corridor, total revenue was $454.3 million, accounting for 63.5 percent of County gaming revenues. Declines were reported across the other major jurisdictions, with the exception of gambling establishments within North Las Vegas, which posted an aggregate increase in revenues of 3.5 percent when compared to the same month of the prior year. Despite declining slot coin-in, Clark County slot win during the month increased by 4.9 percent due to a higher hold percentage. Revenue sourced to games and tables was down 19.4 percent with drop volumes declining 6.8 percent throughout the county, suggesting player luck fared slightly better in November than compared to November 2009.
  • Las Vegas Visitation - According to the latest data released by the Las Vegas Convention and Visitors Authority (LVCVA), visitor volume showed modest improvement for the ninth consecutive month. In November, Las Vegas greeted 2.9 million visitors, an increase of 1.0 percent compared to the same month last year. While an increase is welcoming news, it is the lowest reported increase over the last six months and much less than the 5.7-percent increase witnessed in October. The drop was partially a result of lower demand for conventions as convention attendance reached 372,000, a 14.9-percent decrease over the same period of the prior year. Nevertheless, for the first 11 months of the year, visitor volume is up 2.6 percent while convention attendance is down 0.8 percent, when compared to the same period in 2009. In conjunction with increases in visitor volume, the citywide average daily room rate has moved up, reporting a 2.3-percent increase over the previous year, to an average rate of $94.73 per night. With nine months of consecutive increases, anecdotal reports indicate casino-resorts are starting to pull back discounts implemented during the latest recession. Nevertheless, room rates are still well off the peak of $142.47 per night reached in September 2007.
  • National Consumer Confidence - Following a slight downturn in December, the Conference Board's Consumer Confidence Index rose to 60.6 in January. The index remained volatile in the latter half of 2010, hovering around the 50-point mark, making the latest period the highest since May of 2010. It is also important to note that this is only the second time in more than two years that the index has broken the 60-point barrier. The Conference Board noted that consumers "have begun the year in better spirits", a hopeful sign that business conditions will improve in the coming months. The Present Situation Index increased from 24.9 in the prior month to 31.0, which is much higher than seen in recent months, and now stands at a level not seen in more than two years. The Expectations Index also improved from 72.3 to 80.3, another positive sign that consumer are optimistic about the economy over the next six months. With the consumer confidence index considered to be a leading indicator on the outlook of the economy, its rise is a welcome sign that the overall environment will continue to improve in 2011.

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