ANOTHER REGIONAL REVERSAL?

A disappointing March could put Q1 regional casino estimates at risk following a nice bounce in the stocks.

CALL TO ACTION

Weather adjusted trends have improved since December but March could be a step back.  Q1 estimates look at risk to us and may become evident as the regional states begin releasing March revenues next week.  Even though Q1 estimates came down for BYD, PENN, and PNK, we think more downside remains.  Stocks have bounced nicely off the bottom so be aware.

SETUP

On February 4th, we called for a regional reversal and turned positive on the regional gaming operators based on better than expected January monthly regional trends and better February results.  Weather impacted January and February results but the 2nd derivative was still positive.  As a result, the regional gaming operators garnered investor attention.  Tax refunds and the promise of realized pent up demand during March pushed the stocks up to a mid-March peak - PENN peaked up 16%, PNK +29% and BYD +45% vs the S&P 500 Index up 8% from our Feb call.

Additionally, after the close of the financial markets March 10, Elliott Management disclosed it owned 5.28 million shares of BYD as well as an economic exposure of approximately 2.05% of the common stock outstanding via derivative agreements.  Since then, Elliott Management and its founder, Paul  Singer, have been tight lipped regarding their intensions and plans – likely driven by the licensing nuances of the gaming industry.

Investors and the sell-side believe earnings, especially 1Q14 EPS, have stabilized.  Since our Feburary 4th pivot call, regional gaming stocks have outperformed, led by BYD +32%.  While the regional gaming stocks have retreated modestly since mid-March, downside remains, especially if the March regional revenues come in soft and disappointing as we expect.  We believe 1Q14 and FY2014 earnings could be subject to further negative revisions.   

THE FORECAST

As seen below, our early regional forecasting algorithm predicts March regional gaming revenues will decline 7%, as sequential deceleration from weather impacted results from February.   

ANOTHER REGIONAL REVERSAL? - ss1 

THE EVIDENCE

Two large regional states are tracking below what we believe is consensus thinking for March.  With only one day left in the reported month, Missouri SSS GGR looks like it will close March down 7-8% and Pennsylvania SSS slots falling 5-7% YoY.  Remember that February fell 7% in Missouri and 8% in Pennsylvania - so not much improvement sequentially despite awful weather in February.  Moreover, expectations may be for flat or even better regional GGR YoY given higher tax refunds and pent-up, weather related demand carryover from February.  Neither our model nor the early evidence suggests March regional GGR is close to flat.

THE LONG-TERM

Bad demographics should continue to pressure regional gaming revenues.  Younger generations are simply not interested in slot machines.  We’ve written extensively about this secular headwind so we won’t rehash here.  However, these volatile stocks can move significantly on data points – especially negative, reversal or contra-psychology inflections.