Investors May Be Overpaying for Regional Gaming's Same-Store Sloth

By Brian Egger of BreakingCall.com

NEW YORK ( TheStreet) -- The share prices of leading regional gaming outfits, like Boyd ( BYD), Isle of Capri ( ISLE), Penn National ( PENN) and Pinnacle Entertainment ( PNK), have risen 46% year-to-date, on average, nearly triple the S&P 500's gain during the same period.

In the wake of the sector's stock market winning streak, investors may want to consider folding: It's becoming more difficult to justify further expansion in casino stock valuation multiples.

On average, regional gaming equities currently change hands for roughly 8.6 times trailing 12-month EBITDA. That's not expensive from a historical perspective, but it's not cheap, either. Gaming stocks have, over time, traded in an enterprise value-to-EBITDA multiple range of 5-to-14 times.

To gauge the prospects for additional multiple expansion, we look to three potential sources of growth: acquisitions, same-store growth and new properties.

A few large corporate-level business combinations have been completed in the past year. With Boyd having consummated its buyout of Peninsula Gaming in November 2012, and Pinnacle having recently purchased Ameristar Casinos, there are fewer potential dance partners left for gaming suitors.

Without incremental growth from such acquisitions, casino operators may have to rely increasingly on same-store growth, as it were.

Same-store analytics disregard the contribution from new property openings or acquisitions. They focus instead on the rate of change in revenues generated by productive assets that have been in operation for at least a year.

Looking at those trends has been a pretty cheerless endeavor. During the first six months of 2013, legacy casinos in seven major Midwest and Southeast gaming markets generated aggregate revenues that were 6% to 7% below the revenues observed at those facilities during the first half of 2012.

If one were to roll up the net revenues of three major regional gaming firms -- BYD, PNK and ASCA -- while discarding the properties that had not been open during all of 2012, one would have observed a 5% year-over-year revenue decline. These statistics seem to suggest that casinos have been in a mode of same-store sloth, rather than same-store growth, in recent quarters.

With scant evidence on hand of an industry-wide revenue growth spurt, casino stockholders may have to rely on the step-like growth pattern that has historically been associated with casino openings in new jurisdictions.

When it comes to such unit growth opportunities, the last two years have been busy ones for casino operators. Since May 2012, four major cities in the Buckeye State -- Cleveland, Toledo, Columbus and Cincinnati -- have welcomed the arrival of large new urban-destination casinos. Others have also found homes in Baton Rouge, La., and Cape Girardeau, Mo.

With the prospects for additional consolidation somewhat limited, and industry-wide same-store growth headed downward, the domestic gaming sector may have a lot riding on the success of new casinos that are expected to open.

As we recently discussed in our article about MGM Resorts ( MGM) plans for a northeast gaming corridor, Massachusetts has authorized up to one casino-resort to be built in each of three regions of the Bay State.

Three companies are in contention for a casino license in Maryland's Prince George's County, outside Washington, and Caesar's Entertainment ( CZR) is gearing up for a mid-2014 opening in Baltimore.

Given the industry's recent consolidation, and its pattern of same-store revenue decay, the near-term performance of gaming stocks may hinge on the success prospects of these new casinos.

Without a strong showing by them, or some evidence of a pick-up in revenue growth at existing casinos, regional gaming investors may soon find themselves rolling snake eyes."

At the time of publication, the author did not own any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Brian Egger is the founder, publisher and gaming and travel analyst of BreakingCall.com. During the last twenty years, he has held positions of increasing responsibility as a gaming, lodging and travel analyst at Goldman Sachs, Donaldson Lufkin Jenrette, Credit Suisse, BMO Capital Markets and Topeka Capital Markets. He also served as Associate Director of Research at BMO and Director of Research at the Institutional Research Group. Brian has held four team positions, including two second-place rankings, in Institutional Investor's Gaming, Lodging and Leisure categories. He has also been recognized as a six-time Wall Street Journal "Best on the Street" analyst. Brian taught securities analysis to MBA students as an Adjunct Professor in the Finance department of Columbia Business School. He received a BSE from the Wharton School of the University of Pennsylvania and an MBA from the University of Chicago Booth School of Business.

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