ASCA is one of the few (maybe the only) gaming/lodging companies with dry powder to improve margins. They’ll need it when the duration of the regional downturn extends longer than people are expecting.
In a strong stock market, ASCA is 27% off its recent high and is the worst performing gaming stock since early June. The reasons? A weak Q2 and soft top line through August. The soft top line is likely to persist, longer than investors currently think, in our opinion. That’s a problem for all of the regionals. At least ASCA still has some dry powder in the form of cost cutting that is probably not available to the other gaming operators, and most leisure companies for that matter.
We are of the belief that duration of the regional downturn will be longer than currently anticipated by investors. The gas price headwind beginning in December, a higher sustained savings rate of the US consumer, and a continued decline in the % of Personal Consumption Expenditures devoted to gaming are the major drivers of that thesis. Gaming revenues may disappoint in Q4 and through the first half of 2010.
On the cost side, gaming operators have done a great job cutting. It looks like they need same store revenue gains to generate margin expansion from here on out. They won’t get it. While ASCA has already generated meaningful cost reductions, there is more to come. ASCA’s properties operate a significantly larger number of restaurants and amenities than its competitors in almost every one of their markets. In Kansas City and St. Louis, ASCA owns almost twice as many restaurants as the respective market average.
Why is this important? Food & Beverage (F&B) generate low margins relative to the other functions, and probably negative margins when comped meals and drinks are factored in. F&B comps represent approximately 80% of the total comps for regional casinos. No casino operator makes money on F&B. We think ASCA will close restaurants and reduce operating hours, and has the capacity to do that, should the downturn continue. ASCA incurred about $75 million in expenses from F&B last year and $33 million through 1H 2009. We think the company could save another $15-20 million or $0.16-0.21 in EPS next year.
I don’t know if the cost cutting dry powder is enough to make the stock go higher in the face of an extended downturn. The regionals moved out of a horrible fundamental backdrop to “less bad” then to “stability” this year and we were there cheering them on. Despite no evidence to support “recovery”, the stocks continued to climb. Top line will continue to be a challenge for the regionals and revenue estimates for 2010 are probably too high across the board. However, at least ASCA has a potential offset.