Rebound anticipated in locals casino market

LAS VEGAS -- The locals gaming market has suffered enough.

Gaming revenues produced by casinos in North Las Vegas, along the Boulder Strip, in Henderson and throughout unincorporated Clark County are down a collective 2.6 percent through April.

By comparison, during the first four months of 2013, gaming revenues have climbed 4.7 percent on the Strip and 1.8 percent statewide.

It long has been predicted that neighborhood casinos would be the last to recover as the Southern Nevada economy slowly ascends after bottoming out in 2010.

Amid all the doom and gloom, however, two analysts in the past week said they sense a rebound could take hold in the locals gaming market in the second half of the year.

That’s good news for Boyd Gaming Corporation, Station Casinos, Inc. and other players in the neighborhood casino space.

In April, Boyd Gaming Chief Executive Officer Keith Smith said the company’s Coast-branded casinos, The Orleans and Sam’s Town grew cash flows for the first time in more than a year during the first quarter. He credited a combination of marketing initiatives, new slot machines and a focus on operating margins.

“This performance was a significant accomplishment for our entire team, and we feel good about the overall direction of our Las Vegas locals business,” Smith said.

Union Gaming Group Managing Director Bill Lerner echoed Smith.

Lerner is bullish on the locals market. In a report to investors he was upbeat, citing $6 billion in construction projects planned along the Strip and downtown as well as encouraging economic and labor market statistics from the state’s Department of Employment Training and Rehabilitation.

“All in, following a variety of metrics related to the health of the Las Vegas locals market, we remain bullish on local gaming,” Lerner said.

Deutsche Bank gaming analyst Carlo Santarelli was a little less bullish.

He told investors that the locals market is recovering at a more sluggish pace than the Strip and that it could be four more years before the return of the peak trends of 2007.

However, enthusiasm is building, primarily because of acceleration in the housing market.

“While recent macroeconomic trends indicate the health of the Las Vegas locals market is improving, we struggle to believe that the recent trends foretell of impending improvement in the gaming market,” Santarelli said.

So what does all this mean for investors?

Both Lerner and Santarelli consider Boyd Gaming undervalued. The company’s stock closed at $11.30 on the New York Stock Exchange on Friday, down 22 percent from its 52-week high of $14.50 on May 14.

Santarelli said the pullback in Boyd shares caused him to take a closer look at the locals market.

Though the Las Vegas locals market accounted for 20.7 percent of Boyd’s overall first-quarter revenues, the segment could again become a significant driver of earnings.

Lerner’s view comes from being on the ground in Las Vegas.

In 2006, he became the first Las Vegas-based Wall Street research analyst, and he has witnessed both the good and the bad. Lately, he has seen signs of recovery that others might miss.

“I drive home, and I see new housing development,” Lerner said. “We’re working with people that have firsthand involvement in restaurant development. The key is that people’s spending habits will behave differently if they feel good about the equity in their home and their employment position.”

The other signs come from the Strip and downtown. Projects such as SLS Las Vegas, The Linq, Gansevoort Las Vegas, The Quad, MGM Resorts International’s arena and retail-dining district, and the Downtown Grand have added construction jobs into the market. Next year, Genting Group’s $2 billion Resorts World Las Vegas will spark the construction industry.

Eventually, those projects will add permanent jobs, which in turn fuel the locals gaming market.

“The improving employment and housing picture tells a story of more favorable economic conditions in the state, which should correlate with the improving health of the Las Vegas locals economy, and in turn, locals gaming demand,” Lerner said.

North Las Vegas, the Boulder Strip and balance of Clark County posted modest gains during 2012.

The biggest drop-off this year is from North Las Vegas, which accounts for $16.1 million of the nearly $20 million decline the locals markets have seen through April.

One culprit could be the Aliante Casino, which fell under new ownership and management when Station Casinos decamped last October.

Lerner called the area surrounding the casino’s North Las Vegas location off Interstate 215, “the poster child for the foreclosure story in the U.S.”

Meanwhile, Santarelli worries that both slot machine and table game wagering in the locals market have shown “little to no sign of reaching an inflection point” where play levels show a marked increase.

The neighborhood casino business is still a ways off from being declared healthy.