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Valuation: Casino stocks got clobbered by COVID-19. This one is now an attractive bet

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“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Warren Buffett, Fortune, 1999

Few business models are more reliable than a casino’s. People love to gamble, and because the house has a statistical advantage over its customers in every game it runs, the more people play, the more the casino makes. Factor in all the cash people spend on dining and entertainment inside those bright, windowless boxes and you’ll understand why casinos are inherently good businesses.

In normal times, that is.  

COVID-19 turned the world upside down, especially for businesses that depend on big crowds: theme parks, cruise ships, concert halls, and, of course, casinos. While most of these businesses remain severely depressed, casinos—especially the regional ones, where people drive from their homes for an afternoon or evening of gambling—are making a remarkable and unexpected comeback. Despite this, one casino stock—Gaming and Leisure Properties (ticker: GLPI)—has not fully recovered. That makes it a very good bet, indeed.

GLP is the creation of entrepreneur Peter Carlino, who nearly 50 years ago took over Penn National, a horse track near Hershey, Pa., and turned it into the nation’s largest regional casino business. Carlino’s father, who began modestly as a florist in Philadelphia, was a serial entrepreneur who sent his son to central Pennsylvania to oversee some of the family businesses, including the racetrack. In 1989, the family won the region’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 quickly became the family’s top moneymaker, and Peter Carlino sensed he’d found his calling. “Taking bets on horses at the OTB window is much more profitable than the track itself,” he remembers thinking. “We’re on to something.”

Carlino took Penn National public in 1994, around the same time that many state legislatures, eager for more tax revenue, began to legalize casinos. Carlino wanted in on the action and began to buy ones around the country. In 2000, he bought another horse track, this one in Charles Town, W.Va., in hopes that he could pass a local referendum to legalize gambling. An earlier measure had lost by a 2-to-1 margin, but Carlino spent in a year in Charles Town, applying his considerable charm and energy to reversing the outcome. When the second vote was held, the margin was 2-to-1 for instead of 2-to-1 against.

Carlino decorated the new casino with flashing lights and named it the Hollywood. Drawn by the sparkle and pizzazz, West Virginians made the Hollywood a huge success. This generated enough cash to allow Carlino to build or acquire the top casinos in St. Louis, Kansas City, Baton Rouge, and Columbus, all of them infused with the same aspirational glitz as the one in West Virginia.  

Like a rock quarry or a cable television provider, regional casinos are inherently good businesses. Local economies can support only a few of them, and states often limit the number of licenses granted, restraining the number of competitors. Combined with Carlino’s knack for bringing flair to middle America, Penn National became an enormously successful company. From its IPO to 2013, Penn National compounded shareholders’ returns at 22.5% a year, three times the average rate of the S&P 500 over that period.  

A split, and a surprise

In 2013, Penn National split in two: One company owned the casino licenses and ran the operations, while the other owned the real estate and served as the operating company’s landlord. This same structure—one “asset-light” company and one “asset-heavy”—had worked well in the hotel industry. But it surprised many when Carlino decided to run the landlord—the company that became Gaming and Leisure Properties—instead of the operator. A glimpse at the underlying fundamentals, however, explains why.  

Unlike in the hotel industry, the casino operator must pay for all capital expenditures, either maintenance or expansions. The landlord pays nothing. Even better, Carlino structured the separation so that rent expense to the landlord had to be paid even before interest was paid to the banks. With little to do but sit back and collect the rent, this makes being a landlord to a portfolio of regional casinos a very good business indeed.  

While the company’s 46 properties had to shut down early in the pandemic, they have now all reopened, with impressive results: Revenues are down 10% compared with last year, but operating profits are up 20%. How can this be? In one of COVID’s many unintended consequences, casino activities that pose a high risk of spreading the virus—table games like blackjack and poker, and all-you-can-eat buffets—are also a casino’s least profitable but have had to be shut down. Slot machines, on the other hand, can be spread far apart, require little human interaction, and are thus safe to play. Happily for casinos, slots also happen to be among their highest-margin games. 

It wasn’t a surprise when COVID slammed the shares of Gaming and Leisure Properties, but given the above it’s curious that the stock remains down more than 10% year to date. I started buying GLPI for clients this spring, and I think it remains an attractive investment today in both the long- and short-term.

GLP’s attractive economics make it a good long-term hold, especially for those seeking income. As a real estate investment trust, or REIT, the company is required to pay most of its profits out as dividends. Short-term, there are several minor clouds overshadowing the stock that may soon lift, giving investors the potential for a relatively quick 30% upside.

When COVID first struck, GLP cut its dividend roughly 15%; it also elected to pay most of it in stock. This was not because GLP’s finances were shaky; indeed, GLP is the most regionally diversified among the three American casino REITs. Back then, it wasn’t clear how GLP’s tenants would survive the pandemic, and Carlino wanted to make sure that the company could meet its obligations. Nevertheless, cutting a dividend spooks REIT investors, so GLP has trailed its peers year to date.  

The other knock on the stock is the risk of so-called iGaming, or online casino play. Just as states legalized casinos a generation ago in search of new tax revenues, states are now in the process of legalizing both iGaming and online betting on sports. Some think that iGaming may drain customers from brick-and-mortar casinos just as e-commerce has siphoned off traditional retail foot traffic. Both the evidence and common sense, however, suggest otherwise. Online gaming has been legal in New Jersey, for example, since 2013, but Atlantic City casino revenues have risen in four of the past five years. That’s because even more than shopping, gambling is something people want to experience in person. There’s a reason Carlino built his company around those flashing lights. 

“People are social animals,” Carlino says. “Will they place a bet on a game on their couch? Sure. But will they also keep coming back to the casino? Of course.” 

GLP has said it will restore its dividend to all cash in early 2021. At its current $2.40 payout, GLP trades at a nearly 6.5% yield. This is a discount to where it historically trades relative to 10-year U.S. Treasury bonds. When the dividend resumes in cash, I believe the stock will trade at a yield of less than 5%, which means that the stock should appreciate roughly 30%, from its current $38 to around $50 a share. The company should also increase the dividend next year, providing further upside potential. 

Meanwhile, Carlino remains in central Pennsylvania, doing what he has always done: running the business, keeping his eye out for new real estate deals, and letting the stock price take care of itself. “I look at the stock price maybe once a month,” he says. “My philosophy has always been, put up the numbers; investors will figure it out.”

Adam Seessel is the portfolio manager at Gravity Capital Management LLC, a registered investment adviser. Certain of the securities mentioned in the article may be currently held, have been held, or may be held in the future in a portfolio managed by Gravity. The article represents the views and belief of the author and does not purport to be complete. The information in this article is as of the publication date, and the data and facts presented in the article may change.

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Lyron Foster is a Hawaii based African American Musician, Author, Actor, Blogger, Filmmaker, Philanthropist and Multinational Serial Tech Entrepreneur.

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Warner Bros. Television Group Appoints Black Woman TV Executive As New Chairman

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Days after Peter Roth announced that he was stepping down as chair of the Warner Bros. Television Group, the entertainment giant appointed veteran TV executive Channing Dungey to lead the studio as its new chairman.

The news comes as Dungey, who has worked as an industry leader for decades, recently stepped down from her role as VP of original content and head of drama at Netflix after less than two years. Prior to Netflix, she became the first Black woman executive to run one of the big four networks during her time at ABC. During her stint at ABC, Dungey was responsible for shows, including “The Good Doctor,” the revival of “American Idol” and the reboot of “Roseanne,” which was canceled in 2018 after star Roseanne Barr posted a racist tweet that Dungey called “repugnant,” reports ABC.

“The Warner Bros.Television Group is the recognized industry leader in content creation and a true destination for talent based on its ability to produce across all genres and for all outlets,” said Dungey in a press statement sent to BLACK ENTERPRISE.

“I’m thrilled to be joining the company at such a pivotal time in its history and look forward to working with my new colleagues at Warner Bros. and across the Studios and Networks Group to build on the incredible work of my predecessor, Peter Roth. This is such an electric time in our industry, and we have so much opportunity available to us between Warner Bros.’ core businesses and HBO Max, I cannot wait to dive in.”

In her new role, Dungey will oversee several divisions of the television conglomerate including HBO, HBO MAX, Cartoon Network, TBS, TNT, and numerous others. Her new role starts in early 2021.

“This is a homecoming of sorts for Channing, who was a production executive at Warner Bros. early in her career, and we’re excited to have her rejoin the studio,” said Ann Sarnoff, chair and CEO, WarnerMedia Studios and Networks Group, in a press statement.

“Channing is one of the most talented, visionary, creative and respected executives working in television today,” Sarnoff added. “She has impeccable taste, a breadth of experience covering all platforms and genres, incredible relationships across the creative community, and a keen sense of what’s next and how best to get it to audiences. She’s a great choice to lead the Television Group as it continues to grow its production operations for HBO Max, while also maintaining its standing as the industry’s leading independent supplier of programming to all outlets.”

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How Trump could repeat his 2016 upset in Pennsylvania

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You might yawn and click on for deeper election punditry if I told you that a prominent Republican consultant in Pennsylvania predicts that Trump will pull an upset victory that surpasses his miracle win there in 2016. But Charlie Gerow is so well tuned to the ebbs and flows of momentum in every corner of the Keystone State, from the soccer sidelines in the Philadelphia suburbs to the saloons of the fracking patch, that it’s well worth hearing why he believes Trump’s poor poll numbers way understate his chances.

“I’d say we’re where we were four years ago, maybe slightly better,” Gerow told me. “Of course, an incumbent should be very far ahead at this stage if they’re going to win. But Trump’s a special case. I believe there’s a significant under-vote that doesn’t show up in the polls. A lot of Trump supporters don’t want to be visible.”

Gerow adds that the polls aren’t catching the surging enthusiasm for Trump in the state’s western oil tier. “These counties that were traditionally rock-ribbed Democratic are registering Republicans, a sign of a Trump victory bigger than last time,” he says. “It’s hard to fathom the support for Trump in the western region until you see the yard signs and talk to the folks in the bars and after church.”

Gerow served on Ronald Reagan’s staff during all three of his presidential runs, and worked as a surrogate for George G.W. and George W. Bush on their campaigns for the White House. I first met Gerow by chance one evening at the New York steakhouse Smith & Wollensky, where he was dining with his former boss Ed Rollins, Reagan’s top political lieutenant during his first term. Rollins regaled us with stories about how Nancy Reagan would spend the day calling her wealthy socialite friends in New York and Washington to glean gossip they’d heard at galas and cocktail parties on schemers planting stories to undermine her husband or his favorite aides; then she’d pepper the political team with warnings of alleged plots and plotters. (Rollins is now a partner in Gerow’s firm, Quantum Communications, based in Harrisburg.)

Trump won Pennsylvania by just 44,300 votes, or 0.57% of the total, in 2016, notching the first Republican victory in the state in 28 years. Gerow notes that Hilary Clinton carried the five heavily populated counties that encompass Philadelphia and its suburbs––Philadelphia, Delaware, Montgomery, Chester and Bucks––by 70% to 30%, gaining a 660,000-vote margin out of the total of 6 million cast. Three other urban counties also went to the Clinton column: Allegheny, Lackawanna and Dauphin, respectively homes to Pittsburgh, Scranton and Harrisburg. Trump actually did worse than Mitt Romney in the Philly suburbs, losing Chester, a Republican win in 2012, by 10 points. His coup was taking 56 of 67 counties, sweeping the rural and rust belt corridors, by 58.3% to 41.7%, amassing 250,000 more votes outside the cities and major suburbs than Romney captured four years earlier.

As Gerow points out, the hurdle for Trump is once again garnering a gigantic margin in blue collar and rural communities to offset his big deficits in the metros. The polls are predicting he can’t do it. “I’d say he’s the same or a bit weaker than the last time in Philadelphia and the suburbs,” he says. “But he’s much stronger in the southwest.”

Trump is big in ‘The T’

Gerow predicts that Trump will win five counties in the region south of Pittsburgh––Washington, Greene, Fayette, Westmoreland and Cambria, home to Johnstown––by a wider margin than his 66% win in 2016. He thinks that he’ll also outrace 2016 in the northern farming and forestry tier, known as “The T.”

The southwestern counties form an industrial belt loaded with healthcare and defense manufacturers where Trump’s “America first” trade policies, Gerow says, resonate strongly. “Those were traditional, rock-ribbed Democratic strongholds until the last couple of elections, and Trump has gone much farther than past Republican candidates in turning them red,” says the operative. Trump also flipped Erie County in 2016, and Gerow thinks he’ll expand his 1.5% margin there this year.

Nothing exemplified the 2016 reversal of fortunes better than Trump’s showing in Luzerne County, whose largest town is Wilkes-Barre. The area’s economy was pummeled by the fall of anthracite coal mining, but has rebounded as a hub for distribution centers. In 2012, Romney lost Luzerne by five points. Four years, Trump won by 19%, scoring a 24 point reversal. Gerow believes Trump will win by more this time. He also reckons that Trump’s blue collar wave will capture Lackawanna County, which encompasses Scranton—the city where Joe Biden was born, and that Trump narrowly lost in 2016.

Gerow cites fracking as perhaps the biggest issue in Trump’s favor. “Biden and Harris have flip-flopped on fracking, and voters think that based on their past opposition, they’re fibbing when they say they won’t ban it,” he says. “Their position isn’t lost on a state where several hundred thousand jobs depend on safe development of natural gas.” The roustabouts, rig operators, and mud loggers of the fracking region, he observes, aren’t inclined to the Green New Deal. Gerow also believes that African-American voters in the cities will vote for Trump in much bigger numbers “than the national media would ever think.”

Most of all, Gerow thinks that voters respond more to symbolism than to policies, and Trump is projecting a far more powerful, energetic image than Biden. “The physical difference is a huge plus for a president,” he says. “I’ve worked for three presidents, and after their first term, they’ve all looked a hell of a lot worse. They all get weighed down by the gravity of the office.” He marvels that Trump lives on junk food, doesn’t exercise, and grows ever more overweight, and yet “He thrives on the combat. You may hate him, but he’s the only president who looks better than four years ago.”

Trump’s energy level also astounds this political veteran. “You can say what you want about Trump, but he’s got more stamina than most 20 year olds. After the bout with COVID, he was chomping at the bit to get out. Now he’s buzzing all over the place.” For Gerow, the image of a robust Trump raging at rowdy nightly rallies “connects with voters as no words can.”

Trump’s now trailing by 4.4% in the RealClear Politics average of Pennsylvania polls. But he’s gained 2.7 points from his 7.1% deficit from October 7 to 14. Gerow is predicting a super-close, “knife edge” race that Trump will win by a hair more than the last time. No mystery in politics is more compelling than how the pull of Pennsylvania’s cities and suburbs versus the push of the farming and industrial regions, so closely matched, will play out on November 3.

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