MGM gets it done. Good for MGM management, MGM's bondholders, and those investors who played the deal. And good for IGT. IGT you say? MGM will probably be IGT's number one customer over the next year. Anyone who has walked through MGM's Strip properties lately will notice a little bit of rust on the slot machines. Bellagio still has a lot of the original slots from the Bellagio opening in 1998.
MGM is probably the most important cog in the wheel, but it is not the only one. The recent opening of the credit markets has allowed companies to short up balance sheets, improve liquidity, and avoid covenant breaches. The following casino companies could be more aggressive in the replacement market:
- BYD: The company has dramatically cut back on maintenance capex the past year, including replacement slots. With the big Q1 and ability to buy back discounted bonds BYD is unlikely to breach its leverage covenant. Remember, BYD maintains $2 billion in liquidity on its credit facility and is already free cash flow positive.
- ASCA: Raised $500 million in debt in May which effectively cures any potential senior leverage covenant breach. Company will be free cash flow positive this year.
- PNK: Will likely issue bonds soon given the credit environment. There will be no limitations on PNK's ability to replace machines.
- Harrah's Entertainment - A leading bankruptcy candidate a few months ago, the world's largest slot machine operator has restructured its balance sheet and cut costs. The regional markets are performing better than expected and the fire at PENN's Joliet Empress has given the company an EBITDA boost. If Harrah's starts buying machines again, look out.
- Station Casinos - Once this company goes into bankruptcy, pre-packaged or not, it will have more liquidity to buy much needed replacement machines. Station is the third largest slot machine operator in the US.
- LVS - Not a huge operator but cost cutting and asset sales could put LVS in a much better situation vis-à-vis its covenants.
We predict a V-shaped recovery, not for gaming revenues, but for slot replacement demand. The timing is still uncertain but could it come as soon as 2010? Maybe. The good news is that a recovery is not in the estimates, at least not for IGT. While all the suppliers would benefit from re-accelerating replacement demand, IGT could capture the lion's share due to the mix of the "old" machines. More on that in our next slot post.
Yes IGT has had a great run since it announced its Q2 last month. So what? So has every other gaming stock. That was simply a "the world is not ending" move. The next move will be fundamentally driven. On that front, there has been a lot of good news lately. The simple fact is that IGT's customers are improving their balance sheets, liquidity, and taking covenant issues out of play. Bottom line: Casinos will start buying slots again. As we discussed in our 4/21 note, "IGT: PLENTY OF EARNINGS POWER FOR PATIENT INVESTORS", IGT could earn $1.40 in a normal replacement market and potentially even more for a few years assuming a V-shaped recovery.
