REGIONALS: CAN VALUATIONS HOLD?

I think our delta charts tell a story.  Regional gaming began turning "less bad" in January/February and the stocks squeezed higher beginning in mid-March.  While not necessarily deteriorating, trends have leveled out and are at a critical juncture.  With the exception of Missouri (loss limit removal) and Illinois (lapping the smoking ban impact), the six month moving averages have flattened or even turned negative.

 

REGIONALS: CAN VALUATIONS HOLD? - REGIONAL DELTA CHARTS

 

The macro environment suggests a potential turn for the worse.  Gas prices are rising, the initial government stimulus has flooded the economy, and people for the most part have received their tax refunds, which were larger than normal.  The key question in my mind is what happens to the savings rate.  Yes, the rate already spiked to 4%, higher than it's been through most of the housing boom.  However, 4% is still well below the pre-housing boom average of 8-10%.  The wealth effect suggests that with housing prices down 25% nationally, savings rate may revert to more normalized levels, much to the detriment of consumer spending.

 

Regional gaming should be less susceptible to another consumer downturn than other consumer discretionary sectors (certainly more protected than Las Vegas), but will not emerge unscathed.  Could we already be in the midst of a leg down?  Tough to say, but current valuations are not exactly implying another downturn.  As can be seen in the following chart TEV/LTM EBITDA multiples are in the middle of the historical range, although at levels higher than when we last saw gaming bond yields in double digit (1) territory.

 

REGIONALS: CAN VALUATIONS HOLD? - REGIONAL TEV EBITDA

 

While trailing multiple is not our favorite metric, the data is instructive on relative historical basis, if not on an absolute basis.  Forward EV/EBITDA multiples are in the 6.5x-7.0x range which, as we highlighted in our 4/20/09 note, "GAMING REGIONALS: THE FALLACY OF EV/EBITDA", is probably the right range given the higher cost of capital.  Regional free cash flow yields remain in double digit territory, but low double digit, which is probably where they should be.  BYD remains the standout with a FCF yield at 25% and the only "back up the truck" valuation. 


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more