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Alan Woinski's Monthly Syndicated Column


THE GAME CHANGER

12/14/2012

Syndicated Column by Alan Woinski
President Gaming USA Corp.




It has been a long time since I penned an article for Casino Player and so much has changed in the casino gaming world since then.    For gaming consumers, the increase in casinos means more choices, less of a distance to travel, and more promotional offers in the mail.  For investors in this industry, it has been the opposite as more casinos mean more competition, lower returns on investment for the owners and sluggish stock prices.    Regulators and politicians seem to think that they must go to war, legalizing casinos and putting them on their borders to protect the money from going to a casino in another state.  The result has been investors and analysts all putting their bets on the large companies involved in casinos in Asia, leaving the publicly traded companies in the US to just twiddle their thumbs, hoping for a miracle.

That miracle may have occurred in mid-November when Penn National Gaming (PENN) made the stunning announcement they would divide the company up into what in essence is a Gaming Real Estate Investment Trust and a management company.  The technical term being used by the investment community is PropCo/OpCo but to simplify it, we describe it as a REIT and a management company.  There are REITs in all sorts of industries with the hotel space being the most well known but while there has been a lot of discussions about the possibilities of having gaming REITs, mostly when discussing Las Vegas companies, no one had ever pulled the trigger.   For those who don�t know, a REIT is a vehicle which owns assets and makes investments, sort of like a landlord and private equity firm, and pays out 90% of its earnings to its shareholders as dividends.   It is not uncommon for REITs to pay a 5% dividend yield, quite attractive compared to money market funds but of course they carry higher risk.

In the case of PENN, the reaction by Wall Street was dramatic, sending the shares up 15 points or 40% the day after the announcement.   The actual transaction, in which shareholders of PENN will receive both companies plus a nice fat cash dividend, will not take place until the middle of 2013 but the reaction in PENN and the chatter about how other companies will benefit is the real game changer for gaming stocks.

This transaction highlights all the positive things about gaming stocks that investors have been ignoring.    Despite the industry being what I consider �mature�, or to be kind, slow growth, the reality is most well managed gaming companies generate a tremendous amount of cash flow, have assets including real estate which are never considered by investors and just need to show all this to Wall Street.

During this holiday season we see investors with visions of capital gains for some gaming companies they have held way too long.   For every PENN success story, we know of people who have been holding long time losing positions, hoping their companies will have similar gains.    In our annual Gaming Sector�Yesterday, Today and Tomorrow report we have on sale now (see ad), we highlight how we expect 2013 to be a year where investors are more focused on these recapitalizations and financial maneuvering activities than actual growth and results, a good thing since the competition and returns are going to get worse before they get better.  Despite that, we do not think all companies will benefit and while it is a lot of fun to speculate and dream, reality can be bad for your wallet.   

There is a very good chance that the PENN transaction will result in a much higher �sum of the parts� than what PENN�s average share price was in 2012.   There is also a good chance that a divided PENN is a good thing for potential valuations of other regional casino companies and even those on the Las Vegas Strip and Atlantic City Boardwalk.   You see, a divided PENN could buy or fund casinos, even refinance other casinos� debt and improve operations for others with their management team.   This could help PENN shareholders as well as the companies they get involved with.    The problem with Wall Street is they always dream it will happen to everyone and that is not the case.  Not every company can do something like PENN has, as they don�t have the operations, the assets or the balance sheet.   Companies on the Las Vegas Strip could divide up into separate hotel, convention and retail companies as well as casino operators given analysts already judge them on things like room rates and occupancy, not casino activity.   The companies involved in Macau, Singapore and the Philippines are busy listing their individual Asian subsidiaries on local exchanges.  All these things could make analyzing gaming stocks easier.  

We started this off by saying how things have changed since our last column here.   By now you may be dizzy from reading about these changes but the reality is things may actually get easier for investors if these things occur.   Unfortunately, it seems to us that in order for U.S. based casino companies to improve their operations, it may impact the bonanza the consumers have had in the past few years.   Is it a coincidence that this column has returned to Casino Player in 2013, the year our report is calling for 2013 to be �a painful, transition year for the US casino market�?  We also believe the �volatile characteristic of gaming stocks, combined with the ability to constantly reinvent itself, are the most attractive reasons to invest in the group�.   The PENN deal was not just a Game Changer, it was a wake-up call for investors that abandoned this sector to come back for the new chapter.

 




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