CAPEX, COVENANTS, AND CORPORATE CONTROL

I’ve got a simple thesis on the slot business. Senior corporate management will control the slot Capex decisions in 2009 for the casino operators. I’m not sure the analysts are considering this important observation in their estimates nor are the suppliers in their guidance.

Casino operators are preparing their Capex budgets right now. I know they’re scared. Gaming revenues are down considerably and September was one of the worst months ever. Most importantly, senior managements are very worried about liquidity and covenants, particularly in the first half of 2009. Slot Capex comprises the largest part of maintenance Capex and is the easiest to delay.

I think the suppliers are overestimating 2009 slot demand. Part of this miscalculation is the classic forecasting error of assuming that current trends will continue. Additionally, the suppliers are getting indications of slot demand from casino level management. Unfortunately, 2009 slot decisions will be made at the corporate level and not at the casino level. Another price of excessive leverage.

The chart below examines current Street estimates for slot unit demand and revenue for the first half of 2009. For the Big Three, Analysts are projecting market growth in both metrics over this time period. In the case of BYI and WMS, the estimates are even less believable. I understand that both companies have stolen market share from IGT and may continue to do so. If you believe, as I do, that unit demand and revenues will decline in the first half of next year, further market share shifts would have to be dramatic for WMS and BYI to hit those numbers.


Analysts projecting growth in first half of 2009

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