“Bad” to “less bad” to “stability” to “recovery”, the progression of sentiment encompassed a 155% trough-to-peak move in regional gaming stocks this year. Unfortunately, the stocks may still be reflecting “recovery” sentiment without a supporting fundamental backdrop.
We think the trough to peak move of 155% in regional gaming stocks was driven by three distinct phases of investor sentiment. First, the perception that business trends were turning “less bad” explained the first big move up off of the March 9th low. Following some consolidation, the upward trajectory resumed in early April for more than a month, reflecting a “stabilization” view, in our opinion. Finally, the largest and steepest move began in late April and peaked only a week later on May 5th. We call this the “recovery” phase.
So are the regional gaming fundamentals actually in a recovery phase and, more importantly, will they be over the next quarter or two? The price level of stocks indicates that they should be as the index is squarely in the middle of the “recovery” bounds. Unfortunately, the fundamentals likely have not caught up to the stock moves, nor will they do so any time soon.
We think the best indicator of marginal business trends is our delta chart. The delta chart below clearly shows negative year-over-year gaming revenue trends. Not much of a recovery there. Furthermore, the 3 month moving average line does little to alleviate concerns. In a recovery mode, we would expect a steep, upward trajectory of the line. Yet, despite a favorable July calendar and an easy comp, the line is well below the recent peak in March, and barely off the June low.
Right now, the best indicator of upcoming gaming revenues may be gas prices. The less-than-stellar monthly data occurred despite a pretty massive gas tailwind. This is a pretty scary thought: negative revenues for 6 out of the 7 months in 2009, with gas prices down between 50% and 75% all year long. Remember that in our 6/22/09 post “REGIONALS COULD RUN OUT OF GAS", we showed that every 10% move in the price gas inversely impacts regional gaming revenues by 1.5%. As can be seen in the following chart, the gas tailwind reverses into a major headwind beginning in November assuming current prices continue, climbing to over a 50% increase by the end of the year. If the historical statistical relationship holds, December revenues face roughly a 7.5% hurdle from gas alone. Ouch.