REGIONALS ROLLING [OVER]

Despite easy comps, August is coming in pretty weak.  At the very least, Q3 won’t be a repeat of Q2.  

As we mentioned in our note, “REGIONALS: SHOW ME THE GROWTH, MO" (9/6/11), preliminary revenue data from Missouri may indicate a soft August for the riverboat markets.  So far this year, we have three states that have reported August revenues:

• Illinois same-store gaming revenues down 11% against an August 2010 comp of –6%
• Iowa same-store gaming revenues down 1% versus –3% last year
• Indiana revenues down 5% versus –1% last year
• Even Pennsylvania – which we wouldn’t have characterized as mature yet – fell 6% this August in same-store gaming revenues

One fewer Sunday can’t explain the August weakness.  Nor can a difficult comp, since regional gaming revenues (riverboat) fell 2% in August of 2010.  So what’s going on?  We think it is mostly macro.  Gaming proved to be one of the most, if not the most cyclical consumer sector in the last downturn.  Statistically, housing prices and unemployment have been the most significant drivers of gaming revenues.  Unfortunately, housing prices are still declining and unemployment remains above 9%.  Looking through this lens, we shouldn’t be surprised.

For the first time in many quarters, we don’t see widespread earnings upside for domestic gaming operators.  In fact, some are at risk of missing including ASCA, PENN, and BYD.  We still think PNK has enough secular margin improvement and Louisiana exposure to put up another beat but the size of that beat may not be what investors are used to.  Sentiment is likely to turn, in our opinion. 

PENN looks particularly vulnerable since it has widespread exposure (more negative data points) and more downside to its trough valuation.  Estimates for PENN’s PA casino are also looking high given the surprising and severe slowdown there.  Finally, being a Wall Street darling now could be a liability on the way down.

The following charts analyze regional gaming revenues on a sequential basis.  From this view, the regional performance looks even worse.  Depending on the state, sequential performance began to deteriorate in May, June, or July and all three states depicted underperformed again in August.