Investors show new love for regional casino markets

The Lake Charles, Louisiana casino market is the best example why the investment community has done a 180-degree turn on the U.S. gaming operators.

Moody's Investors Service said the casino industry's cash flow prospects could climb as much as 4 percent over next 12 to 18 months. The firm's opinion was a reversal from its prediction a year ago that casino markets would see cash flow declines ranging from 4.5 percent to 7.5 percent. Instead of a 5 percent overall decline in gaming revenue, Moody's now predicts 2 percent increases in most casino states throughout next year.

So what changed?

A year ago, analysts worried new casino openings would steal away customers from older properties in competing markets.

Lake Charles was considered a case study for casino cannibalization. The western Louisiana town draws much of its business from the populous Houston area. The two communities are separated by a 2½-hour car ride along Interstate 10. Houston-based Landry's spent $700 million to open the Golden Nugget Lake Charles last December.

But instead of siphoning off business from Pinnacle Entertainment's L'Auberge Lake Charles and the Isle of Capri Casino Hotel - Lake Charles, Golden Nugget grew the market and shared the wealth. Lake Charles overall gaming revenue increased 66 percent in the initial month, and the pace has kept up through the first half of the year.

Moody's said the Golden Nugget Lake Charles, as well new casinos in Maryland and Ohio, contributed to statewide gaming increases after their openings, suggesting "the amount of revenue cannibalized from existing casinos could be easing."

Other factors helped Lake Charles grow. Houston is the fourth-largest city in the U.S. with a population of more than 2.1 million people. The area's economy is on an upswing. Meanwhile, Texas continues to reject legalized casinos, sending its gaming residents to gambling halls in neighboring Louisiana, as well as Indian casinos in Oklahoma.

Boyd Gaming Corp. saw the numbers coming out of Lake Charles. The Las Vegas-based company announced plans this month to spend $45 million to expand its Delta Downs Racetrack Casino & Hotel in Vinton, La., which is near Lake Charles.

Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said Boyd benefits by "more patrons making the trek" from Houston into Louisiana.

Deutsche Bank gaming analyst Andrew Zarnett expects the casino capacity added to Lake Charles will continue to "fill a void" in the feeder markets.

Moody's said 18 U.S. states with casinos reported a 4.1 percent increase in monthly gaming revenue during May, following a 4 percent increase in April. In May, every state but New Jersey and Connecticut saw improvement. With these numbers in hand, the advisory firm changed its overall outlook of the U.S. gaming industry from a negative to a stable rating.

Still, Moody's gaming analyst Keith Foley provided a cautionary note.

"Our revenue and cash flow forecast incorporates our view that consumers, who remain under pressure from weak growth in disposable personal income, will continue to limit their spending to items that are more essential than gaming," Foley said.

Moody's said another factor helping casino industry profitability is the massive cost-cutting efforts undertaken during the recession. Foley said the companies are "reaping the benefits of lower cost structures and improved operating leverages."

He expects cost-cutting to continue, but to "a lesser degree."

Other analysts have also weighed in on the industry's prospects.

Deutsche Bank's Carlo Santarelli increased his stock price targets for Boyd, Penn National Gaming and Pinnacle after regional gaming states reported stronger than expected revenue totals in May and June. He said there was optimism that regional gaming results could start mirroring broader economic factors, such as the gross domestic product figures.

Even as casino expansion talk heats up in new gaming jurisdictions, all is still not right in some markets.

A day before Moody's revised its ratings, The Washington Post focused on Tunica, Miss., as the newspaper began a multipart series on the Deep South's financial troubles caused by the recession. Casinos in Mississippi's river counties, which include Tunica, collected $988.4 million in in gaming revenue in 2014, down 40 percent from the peak of $1.660 billion in 2006. Harrah's Casino Tunica, the area's largest casino, closed a year ago.

Foley said Moody's could easily change its view of the casino industry back to negative or increase the rating to positive depending on the next few months of results.