THE UPSIDE OF A DOWNTURN

 “Never allow a crisis to go to waste” – Rahm Emanuel

An ever expanding list of states look to expand gaming. In the unlikely event of a v-shaped economic recovery, a state(s) of fiscal desperation will still prevail. We’re entering an extended bull market for slots.

Hopefully, the slot companies are heeding Mr. Emanuel’s advice and pushing their lobbying efforts at maximum effort.  There are plenty of dominoes yet to fall while many are already tilting.  Prospects for expanded gaming in Ohio, Iowa, Illinois, and Pennsylvania look decent.  With the pressing need for cash, states may step on the accelerator.  Long timelines experienced in Pennsylvania and Maryland are unlikely in these desperate times.

Here’s the state by state summary:

  • Ohio - Governor Strickland signed a directive instructing the director of the Ohio Lottery to immediately begin the process of implementing VLT’s at racetracks.  More details will become available today as the budget is released.  The approved legislation permits a maximum of 2,500 video lottery terminals at each of Ohio’s seven racetracks.  Requirements for each of the racetracks include a $100,000 application fee, a $65 million licensing fee, 50% of all net revenue being retained by the state, and capex requirements of at least $80 million in the first five years of operation with at least $20 million of that in the first year.  The proposal to open the door to four new casinos in downtown Cincinnati, Columbus, Cleveland, and Toledo could be back on the table. The Ohio Jobs and Growth Plan (OJGP) petition to have casinos voted on again in November collected more than twice the necessary amount of signatures required by the state government (400,000).  The Secretary of State is expected to give a final ruling on whether there is a sufficient number of valid signatures on the petition.  Despite the racetracks directive from Gov. Strickland, the OJGP plans to continue its campaign for four new casinos in Ohio.

 

  • Illinois - The Video Gaming Act was signed into law as part of House Bill 255.  The Act creates a new video poker market under the control of the Illinois Lottery Commission.  The Illinois Coin Machine Operators Association believes the number will end up being around 45,000 to 50,000 units.  The machines will be placed in licensed establishments (bars, taverns), licensed truck-stops, licensed fraternal establishments, and licensed veteran establishments.  The Illinois Gaming Board anticipates that it will be at least a year before gamblers in the Prairie State can legally play video poker.

 

  • Iowa - In light of Illinois approving video poker, Iowa is trying to decide how best to maintain its gaming market. The Iowa Gaming Commission held a public meeting on Thursday and, after some public comment, unanimously agreed to consider licensing new casinos.  Commissioners’ comments seem to indicate that they will be protective of casinos that are already open and that this process for granting new licenses will be more complicated than it was in the past.   The deadline for applications for licenses is October 1st and the commission is expecting five applications.  Press reports indicate that it could take up to a year for the commission to make any final decision.  Lyon County, in northwestern Iowa, could have a strong chance; the market is underserved and so cannibalization of other casinos’ revenue would not be an issue.  It would also draw from the Sioux Falls, South Dakota, market.  It seems likely that at least two new casino licenses will be granted with 2,000-3,000 slots.

 

  • Pennsylvania - A Pennsylvania state House panel has approved, on the second attempt, a bill that would legalize and tax video gambling machines in bars.  The proposal is designed to generate grants for tuition costs at one of the fourteen state-owned universities or the fourteen community colleges in Pennsylvania.  Some of the votes for the bill were more tepid than others.  Rep. Curtis Thomas voted yes but still wants to make major changes to the bill when it comes up for action on the House floor.  Even if the House passes the bill before the summer break, Senate action is unlikely before the fall. 

 

IGT is the obvious play on new gaming jurisdictions since it is the largest slot provider in the world and tends to garner a larger market share in new casinos and expansions (60% vs 40% in replacements).  IGT generates about $0.015 in EPS per 1,000 slots sold.  Indeed, the stock has performed well recently due in part to the potential for new markets.  The long term takeaway is that there will be expanded gaming, the fiscal crisis will dictate that.  The only question is which states and when?  The right trading strategy might be to fade optimism of new legislation and buy into pessimism.  Either way, slots could be at the cusp of a huge bull market as replacement demand is troughing and state fiscal desperation opens new markets across the country.


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