Gambling Stock Roundup: High Visitation Did Not Help Macau; Iao Kun Group & Full House on Recovery Trail - Analyst Blog

Last week ended on a mixed note. Weak performances in the Golden Week – the seven-day National Day holiday in China – proved yet again the heaviness in the region. Share prices of companies operating there continued to tumble. In fact, the declining revenue trend in Macau over the past four quarters is expected to continue in October.

However, the pessimism was partially tempered by the Rolling Chip Turnover results declared by Iao Kun Group Holding Company Limited (IKGH) that were up 5% year over year. Meanwhile, Full House Resorts Inc. (FLL) seems to be on the path of recovery with a move taken by its three shareholders to appoint a new set of directors on its board. (Read last to last week's development: Gambling Stock Round Up for Oct 6, 2014)

Recap of the Week's Important Stories:

1.    Though visitation pattern was high in Macau during the Golden Week, average daily revenue was reportedly only 1.2 billion Macau pataca during that period, down 33% year over year. Per the analysts, mass floors were busy, while VIP gambling remained weak. We believe that the government's anti-corruption drive has affected footfall keeping away VIP gamblers from the casino floor.

However, this has been the trend for some time now, resulting in revenue declines in the region for the past four months. September witnessed an 11.7% fall in revenues. What is more concerning is that the situation is not expected not improve in the near term.

With more troubles rearing their head up, a few analysts expect a steeper decline for the month of October. For example, restriction by China to issue group tour visas to Hong Kong because of the protest as well as the recent implementation of ban on smoking in the casinos are expected to hurt results.

2.    Iao Kun Group Holding announced last week that Rolling Chip Turnover for VIP rooms in Macau for the month of September was $1.18 billion, up 5% year over year. Meanwhile, win rate for the month was 2.84%. Notably, Rolling Chip Turnover is used by casinos to measure the volume of VIP business transacted and represents the aggregate amount of non-negotiable chips players purchased.

3.    Three shareholders of Full House Resorts who own 6.2% of the outstanding shares of the company sent a letter to the other shareholders. Per the letter, they intend to call a Special Meeting in order to expand the board of directors to ten of which five would be highly qualified individuals. These shareholders are concerned that the company has of late not performed diligently.

These shareholders particularly mentioned that over the past one year, the company has lost almost 60% of its share price. They claimed that over the past five years, executive compensation has increased by a substantial 59% which is unjustified given the size and performance of the company.

To add to it, the company has not performed well over the past few quarters. In fact, during the last quarter, Full House Resorts posted disappointing results given the ongoing competition and soft economic conditions, particularly in the Midwest.

Despite weak performances and three poorly performing acquisitions, they stated that the company entered into agreements to acquire Fitzgerald's Casino in Tunica, MS in Mar 2014 for $63 million, exclusive of working capital and expenses. In the current acquisition agreement of Fitzgerald's Casino, the company failed to manage risks and lost 97% of its escrow deposit.

As things stand at the company, these shareholders believe that the board requires additional experience and independence. It stated that the company requires a board that will work diligently to manage existing properties and focus on strategic alternatives.

4.    Caesars Entertainment Corp. (CZR) has also been struggling to restructure a portion of its $24.2 billion long-term debt and has appointed Keith Causey as Senior Vice President and Chief Accounting Officer. Causey will replace Diane Wilfong, who has left the company.

Causey will be responsible for overall corporate accounting and internal audit functions and will report to Donald Colvin, Executive Vice President and CFO of Caesars Entertainment. Prior to joining the company, Causey has gathered critical experience in various fields at General Motors Company and DIRECTV.  The company believes that with more than 20 years of experience, Causey brings with him an extensive technical accounting background as well as regulatory compliance expertise making him an ideal candidate.

Performance

Share prices of all the gambling stocks declined last week. Caesars Entertainment collapsed 23.7%, followed by 14% decline of Boyd Gaming Corp. (BYD). Over the last six months, all gambling stocks lost value with Caesars Entertainment and Melco Crown Entertainment Ltd. (MPEL) losing the maximum – 36.5% and 31.4%, respectively.

What's Next in the Gambling World?

Las Vegas Sands Corp. (LVS), which holds a Zacks Rank #4 (Sell) and has an Earnings ESP of +3.57%, is set to report third quarter 2014 results on Oct 15, 2014, after the market closes.

We note that gambling stocks have oscillated between gains and losses in recent sessions and investors can expect this volatile movement to continue in the coming days as well. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>