Las Vegas: There’s Good News And Bad News…
We all know by now that what happens in Vegas doesn’t stay in Vegas. To that point, Morgan Stanley’s Thomas Allen and his team recently visited the city and met with Boyd Gaming (BYD), Caesar Entertainment (CZR), Eldorado Resorts (ERI), Las Vegas Sands (LVS), MGM Resorts (MGM), MGM Growth Properties (MGP), and Wynn Resorts (WYNN) and came away slightly more bearish on the outlook for the Vegas demand environment, but more bullish on ‘operating smarter’ and momentum in Macau.
First, the good news. Allen writes that they heard a lot about how casinos are operating smarter than they or others had in the past. That means using big data to decide where to reinvest, rather than chasing unprofitable businesses: “This is manifesting itself in BYD’s 250-300bps 3-year margin uplift goal, MGM’s shift away from RevPAR growth to its profit per occupied room strategy, CZR’s counter-intuitive but successful calling strategy and part of its significant cost savings ($800m over past 2 years), and one of the main reasons ERI has become relevant.”
The industry is also learning to take advantage of its historically high free cash flow multiples, as evidenced by dividend and buyback initiations, and Allen thinks that these can continue even if companies do small acquisitions—and could be bolstered by asset sales. Allen is also heartened that there appears to be high interest in the investment community about gaming, which could lead to more money rotating into the sector.
He also writes that Macau is promising, and that his top pick, Wynn, is benefiting from having properties on both the peninsula and Cotai (a factor that’s hampering MGM at the moment), as well as a resurgence of VIP demand in the market. Elsewhere in Asia, he thinks that Las Vegas Sands can ramp its EBIDTA in Singapore.
Still, Allen has concerns. He notes that when there’s not a major convention or special event, Las Vegas is seeing softer than expected demand. Even big headline events might not be enough to draw visitors, as the Mayweather-McGregor fight has yet to sell out. (Of course timing and other issues may be weighing on that, fights aren’t great for margins, and expectations are already tempered.)
Moreover, some hotels have been dropping prices to attractive customers, which a risk industry-wide to high end properties and margins. In addition, he worries that casinos are increasingly focusing on their license bids for Osaka in Japan, which could be a risk given the likelihood that only one license will be awarded.