Consumer Confidence came in at the highest level since 2008. Really? Is this a real world picture or a possible politicized number from a smaller sample of the population? As we look at industry after industry, it appears that the consumer is not confident, not spending consistently. Last week’s retail sales confirm this with misses in Costco, Target, Limited and Ross, to name a few, but beats by Macys, Nordstrom, and Saks. Does this tell us the upper income Americans are spending and lower and middle income America is not and still getting pinched?
What does the gaming industry tell us about the general consumer, as that seems to be a good gauge as all income classes seems to try to prosper at the tables and machines?
Gary Loveman, Caesars Entertainment Chairman, Chief Executive Officer and President discussed the “more competitive markets and the challenges posed by the continuing weakness of the U.S. economy.” Loveman went on to say of his business,”Reflecting the sluggish economic conditions, customer visitation declined in all regions and spend per trip declined in several regions.”1
This tells me that many Americans are still being pinched and this will remain the “new normal,” despite what the stock market has done. Rather than a fundamental advance where corporate revenues and earnings are driving it higher, we instead view the stock market as only becoming more expensive with its multi-year run up (i.e., speculation).
Some evidence on what a few of the largest gaming operators have done in their latest reporting period is below. Keep in mind, these highly leveraged companies are held by both of the index-based high yield ETFs and by many of the large mutual funds.
Ameristar Casinos reported a modest miss in Q3 2012, and leverage is expected to increase in the near-term as they ramp up their capital expenditure efforts. They were able to extend debt maturities and LTM leverage is 5.0x2, which is okay, but you pay ~$107.50 for the bonds and for that only get ~5.8% yield.3 Is that worth the risk? We don’t think so.
MGM’s third quarter EBITDA results came in below street expectations, as the company continued to face a “challenging consumer environment.”4 Revenue per room was down 2% y/y on the all-important Las Vegas strip.
Caesars’ revenue was flat in the third quarter. They have been extending maturities, buying them some time, but they must grow their way out of the heavy debt load following the LBO. One Wall Street investment bank noted, “Despite its success in pushing off actual repayment by refinancing debt, CZR must find a way to grow more robustly. We think the odds are not in the company’s favor, especially as competition continues to intensify.” 5 We would agree.
As we have written about in our blogs, Twitter and in our white papers and have also spoken about on Fox Business Channel and Bloomberg TV and radio over the last few months, there are severe headwinds out there and you better be careful in where you place your bets.
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