“The important thing to investing isn’t assessing how a lot an trade goes to have an effect on society, or how a lot it should develop, however relatively figuring out the aggressive benefit of any given firm and, above all, the sturdiness of that benefit.”
—Warren Buffett, Fortune, 1999
Few enterprise fashions are extra dependable than a on line casino’s. Folks like to gamble, and since the home has a statistical benefit over its clients in each sport it runs, the extra individuals play, the extra the on line casino makes. Consider all of the money individuals spend on eating and leisure inside these vivid, windowless packing containers and also you’ll perceive why casinos are inherently good companies.
In regular instances, that’s.
COVID-19 turned the world upside down, particularly for companies that depend upon huge crowds: theme parks, cruise ships, live performance halls, and, after all, casinos. Whereas most of those companies stay severely depressed, casinos—particularly the regional ones, the place individuals drive from their houses for a day or night of playing—are making a outstanding and sudden comeback. Regardless of this, one on line casino inventory—Gaming and Leisure Properties (ticker: GLPI)—has not absolutely recovered. That makes it an excellent wager, certainly.
GLP is the creation of entrepreneur Peter Carlino, who practically 50 years in the past took over Penn Nationwide, a horse observe close to Hershey, Pa., and turned it into the nation’s largest regional on line casino enterprise. Carlino’s father, who started modestly as a florist in Philadelphia, was a serial entrepreneur who despatched his son to central Pennsylvania to supervise among the household companies, together with the racetrack. In 1989, the household received the area’s new offtrack betting concession, and Carlino’s father tapped Peter to run it.
With little else to entertain them, central Pennsylvanians flocked to the Carlinos’ OTB parlors. It shortly grew to become the household’s high moneymaker, and Peter Carlino sensed he’d discovered his calling. “Taking bets on horses on the OTB window is far more worthwhile than the observe itself,” he remembers pondering. “We’re on to one thing.”
Carlino took Penn Nationwide public in 1994, across the identical time that many state legislatures, looking forward to extra tax income, started to legalize casinos. Carlino needed in on the motion and started to purchase ones across the nation. In 2000, he purchased one other horse observe, this one in Charles City, W.Va., in hopes that he might move an area referendum to legalize playing. An earlier measure had misplaced by a 2-to-1 margin, however Carlino spent in a 12 months in Charles City, making use of his appreciable attraction and vitality to reversing the end result. When the second vote was held, the margin was 2-to-1 for as a substitute of 2-to-1 towards.
Carlino adorned the brand new on line casino with flashing lights and named it the Hollywood. Drawn by the glint and pizzazz, West Virginians made the Hollywood an enormous success. This generated sufficient money to permit Carlino to construct or purchase the highest casinos in St. Louis, Kansas Metropolis, Baton Rouge, and Columbus, all of them infused with the identical aspirational glitz because the one in West Virginia.
Like a rock quarry or a cable tv supplier, regional casinos are inherently good businesses. Native economies can help only some of them, and states typically restrict the variety of licenses granted, restraining the variety of rivals. Mixed with Carlino’s knack for bringing aptitude to center America, Penn Nationwide grew to become an enormously profitable firm. From its IPO to 2013, Penn Nationwide compounded shareholders’ returns at 22.5% a 12 months, thrice the common fee of the S&P 500 over that interval.
A break up, and a shock
In 2013, Penn National split in two: One firm owned the on line casino licenses and ran the operations, whereas the opposite owned the actual property and served because the working firm’s landlord. This identical construction—one “asset-light” firm and one “asset-heavy”—had labored nicely within the lodge trade. However it shocked many when Carlino determined to run the owner—the corporate that grew to become Gaming and Leisure Properties—as a substitute of the operator. A glimpse on the underlying fundamentals, nonetheless, explains why.
Not like within the lodge trade, the on line casino operator should pay for all capital expenditures, both upkeep or expansions. The owner pays nothing. Even higher, Carlino structured the separation in order that lease expense to the owner needed to be paid even earlier than curiosity was paid to the banks. With little to do however sit again and accumulate the lease, this makes being a landlord to a portfolio of regional casinos an excellent enterprise certainly.
Whereas the corporate’s 46 properties needed to shut down early within the pandemic, they’ve now all reopened, with spectacular outcomes: Revenues are down 10% in contrast with final 12 months, however working earnings are up 20%. How can this be? In one in all COVID’s many unintended penalties, on line casino actions that pose a excessive threat of spreading the virus—table games like blackjack and poker, and all-you-can-eat buffets—are additionally a on line casino’s least worthwhile however have needed to be shut down. Slot machines, alternatively, may be unfold far aside, require little human interplay, and are thus protected to play. Fortunately for casinos, slots additionally occur to be amongst their highest-margin video games.
It wasn’t a shock when COVID slammed the shares of Gaming and Leisure Properties, however given the above it’s curious that the inventory stays down greater than 10% 12 months to this point. I began shopping for GLPI for purchasers this spring, and I believe it stays a lovely funding as we speak in each the long- and short-term.
GLP’s enticing economics make it an excellent long-term maintain, particularly for these looking for earnings. As an actual property funding belief, or REIT, the corporate is required to pay most of its earnings out as dividends. Quick-term, there are a number of minor clouds overshadowing the inventory that will quickly raise, giving buyers the potential for a comparatively fast 30% upside.
When COVID first struck, GLP lower its dividend roughly 15%; it additionally elected to pay most of it in inventory. This was not as a result of GLP’s funds had been shaky; certainly, GLP is probably the most regionally diversified among the many three American on line casino REITs. Again then, it wasn’t clear how GLP’s tenants would survive the pandemic, and Carlino needed to ensure that the corporate might meet its obligations. However, reducing a dividend spooks REIT buyers, so GLP has trailed its friends 12 months to this point.
The opposite knock on the inventory is the chance of so-called iGaming, or on-line on line casino play. Simply as states legalized casinos a technology in the past in quest of new tax revenues, states are actually within the strategy of legalizing each iGaming and on-line betting on sports activities. Some assume that iGaming might drain clients from brick-and-mortar casinos simply as e-commerce has siphoned off conventional retail foot site visitors. Each the proof and customary sense, nonetheless, recommend in any other case. On-line gaming has been authorized in New Jersey, for instance, since 2013, however Atlantic Metropolis on line casino revenues have risen in 4 of the previous 5 years. That’s as a result of much more than purchasing, playing is one thing individuals wish to expertise in particular person. There’s a cause Carlino constructed his firm round these flashing lights.
“Persons are social animals,” Carlino says. “Will they place a wager on a sport on their sofa? Positive. However will in addition they maintain coming again to the on line casino? After all.”
GLP has stated it should restore its dividend to all money in early 2021. At its present $2.40 payout, GLP trades at an almost 6.5% yield. It is a low cost to the place it traditionally trades relative to 10-year U.S. Treasury bonds. When the dividend resumes in money, I imagine the inventory will commerce at a yield of lower than 5%, which implies that the inventory ought to recognize roughly 30%, from its present $38 to round $50 a share. The corporate also needs to enhance the dividend subsequent 12 months, offering additional upside potential.
In the meantime, Carlino stays in central Pennsylvania, doing what he has at all times achieved: working the enterprise, preserving his eye out for brand new actual property offers, and letting the inventory value maintain itself. “I have a look at the inventory value possibly as soon as a month,” he says. “My philosophy has at all times been, put up the numbers; buyers will determine it out.”
Adam Seessel is the portfolio supervisor at Gravity Capital Administration LLC, a registered funding adviser. Sure of the securities talked about within the article could also be at the moment held, have been held, or could also be held sooner or later in a portfolio managed by Gravity. The article represents the views and perception of the writer and doesn’t purport to be full. The data on this article is as of the publication date, and the info and information offered within the article might change.
Extra must-read finance coverage from Fortune:
- What Wall Street needs from the 2020 election
- How J.P. Morgan is continuing with excessive warning—and nonetheless making plenty of money
- “A story of two Americas”: How the pandemic is widening the financial health gap
- A disputed election could cost the U.S. its “AAA” credit rating
- As earnings season kicks off, only 48% of companies have resumed giving investors guidance