Rank Group (RNK) recently delivered a profit warning as part of a Q4 trading update, blaming the slower-than-expected return of higher-spending overseas gamblers to its London casinos. So, perhaps it’s timely to review the viability of investing in casinos during an economic downturn. For investment purposes, we will also refer to the handful of casino operators trading publicly in the US, as several of them also have extensive interests in Macau and other industry hot-spots.
The pandemic impact on the casino industry was immediate and wide-ranging once it became obvious that infection rates were rising exponentially. Nonessential businesses were shut in March 2020 to help curb the transmission of Covid-19, the first time that casinos on the Las Vegas Strip had been closed since the 1963 assassination of President John F. Kennedy. (It should also be noted that the virtual cessation of most forms of sports betting hit the gaming industry hard.)
Casino numbers fell off a cliff, not only in terms of gamblers but also in relation to convention delegates, another significant revenue stream for the casinos. Large casinos, in common with the hotel industry in general, rely on high occupancy rates to drive profits, but they have also been realigning their business models to take advantage of the liberalisation of online gambling laws in many US states, as politicians scramble to gain access to the lucrative tax revenues on offer.
Gambling companies such as MGM Resorts International (US:MGM) and Caesars Entertainment (US:CZR) were quick to augment their traditional offering with online channels, adding a defensive element to the investment case even as conventional footfall dragged to a halt.
The geographic spread of the gaming industry should also theoretically provide a degree of insulation in the face of varying regional economic performance. Unfortunately, the pandemic does not recognise national borders, although it’s interesting to note that casinos in Macau – the world’s biggest gambling hub – have been allowed to keep their doors open, even as bars, cinemas and hair salons have recently been forced to put the shutters up as China continues to doggedly pursue a zero-Covid strategy.
The US presence in Macau is linked to several casinos operated by subsidiaries of Wynn Resorts (US:WYNN), Las Vegas Sands Corp (US:LVS), and MGM Resorts. Operators in Macau will be subject to changes in licensing arrangements later this year, but it is unlikely that this will result in any disruption given how well they are embedded in the economy of the ‘special administrative region’.
Macau aside, prospects for the sector were set fair as the US gradually shook off the Omicron variant. Footfall in Las Vegas and other gambling centres was certainly picking up throughout the second half of last year. Figures from the Las Vegas Convention and Visitors Authority show that visitor numbers had increased by 69 per cent from the prior year to 32.2mn, although that’s still down by a quarter on the 2019 rate.
Even so, the easing of Covid-19 restrictions was hotly anticipated by investors in the sector – yet it was clear that macroeconomic conditions had already begun to deteriorate by the fourth quarter of 2021. Inflation is the chief bugbear and successive multi-decade highs could conceivably call into question some of the tropes associated with ‘sin stocks’, particularly that demand for their products is somehow recession proof.
Admittedly, the American Gaming Association recently revealed that commercial gaming revenue in the first quarter of this year nearly matched the record $14.4bn (£11.8bn) generated in the final quarter of 2021. Closer to home, Flutter Entertainment (FLTR) – the world's largest online betting outfit – said that inflation had yet to dampen activity in its main UK and Ireland market, while volumes were growing rapidly in the US.
Whether this equates to pent-up demand is difficult to say, although trade bodies will always be reluctant to provide a nuanced viewpoint, regardless of the statistics. It is hard to believe that punters would not become more reluctant to make a wager given the severity of cost inflation in the economy. A recent survey conducted by YouGov suggests that nearly a fifth of UK gamblers would consider stopping gambling altogether in the coming months in response to the ongoing cost of living crisis.
Although gaming volumes may have given cause for industry optimism across the pond, it’s probably more telling that share values for the casino operators (and Flutter) have cratered despite an apparent trading recovery under way. With the VanEck Gaming ETF (US:BJK) down by 35.2 per cent in value over the past 12 months, the market is not convinced that the industry remains recession proof. Nevertheless, a company such as Caesars Entertainment may well present a viable recovery play given its dominant position on 'The Strip'.
