- The first chart shows the average trailing leverage ratio over the past 10 years. We are at a 10 year high which on the surface is troubling and looks like the end of the classic boom and bust cycle. However, liquidity profiles for most of the casino companies are in great shape and borrowing costs are low. Contrast this with the private gaming companies. This is where we’ve seen the recent bankruptcies and will likely see the next few bankruptcies.
- The next chart is busy I know but drills down into the specific metrics for the casino operators. On the surface ISLE appears to be a bankruptcy candidate but Dale Black, CFO, has done an outstanding job with this once dire financial situation. Despite a ton of leverage and a low coverage ratio, near term liquidity is significant, the company is free cash flow positive on a net basis, and there are no significant debt maturities until 2012. BYD, PNK, and LVS maintain aggressive development pipelines but for the most part, projects can be cancelled or delayed. MGM is probably at most risk due to its high exposure to Las Vegas where I see the most downside. Moreover, MGM has high leverage and significant maturities in 2010. Kerkorian and Dubai World are, of course, potential backstops.
- As the shorts continue to press the regional casino companies along with other highly leveraged companies, an advantageous liquidity situation seems to have been overlooked. The industry capitalized on the financing fat years by negotiating significant liquidity and low borrowing costs. Sure there are issues but significant liquidity will keep these guys out of the red zone until at least 2010.
- As a result, I believe that restaurant analysts are going to increase their scrutiny of traffic trends as traffic is the primary indication of the health of a concept.
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Fannie had a +30% squeeze move today on huge volume to close at $9.20.
My model has this stock with the potential to run-up to $13.02, and nothing changing in terms of its bearish formation. If it does, how many short selling geniuses out there can manage that risk?
- Fannie (FNM)
- Three themes to take away from companies that have gone bankrupt:
(1) Family dining and Casual Dining make up the bulk of companies that have gone bankrupt.
(2) Inefficient consumer proposition
(3) Executive suite revolving door
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