Bad weather in January and 1H of Feb may have masked strengthening regional demand. We think March will show a nice uptick that could reverse recent negative investor sentiment.
We’ve been no big cheerleader for regional gaming companies lately. Revenue growth has been nonexistent, weather has been bad, and catalysts have remained elusive. Investor sentiment now seems to be on the same page. Well, we are turning the page. The Street is comprised of slow readers.
January and February were not great months on an absolute basis for the regional gaming markets. However, weather was an issue and probably masked some underlying strengthening of demand. As can be seen in the following chart, actual gaming revenues in February was weak, contributing to lower stock performance. February, however, was better, despite the weather although investors just looking at YoY change would’ve missed it.
Through our contacts, we are hearing March has been strong month to date. We think March will generate YoY growth, better than February’s 3% decline and better than the sequential, seasonally adjusted prediction of down 1%. A strong March should contribute to earnings upside for a couple of names in our universe.
We favor pure play regional operators ASCA and PNK. Both look like they will beat Q1 earnings estimates and carry large free cash flow yields. ASCA, in particular, has a history of generating outsized investment returns when its FCF yield rises over 20% and the company begins to beat earnings expectations. We believe we are in that scenario currently.
This resurgence may be no more than a trade. Certainly, we still harbor macro concerns about whether this recovery is sustainable. The American consumer faces significant hurdles. Gaming has proven to be one of the most cyclical of the consumer sectors so any downturn should hit the casinos disproportionately as it did in 2009. However, successful trades in gaming can pay investors annual and two year returns in a matter of months.
