In May this year, the term of Jerome Powell, the chairman of the Federal Reserve, will expire, and who will succeed him has become a hot topic in Washington. For the American gambling industry, this change in central bank leadership may offer a breath of fresh air. The market generally expects that whether it is Kevin Warsh or someone else taking office, they will promote interest rate cuts to align with the Trump administration's economic agenda. Simply put, the interest rates above 5% in the past two years have made it expensive for gambling companies to borrow money, difficult to finance, and their stock prices have plummeted. Now, they are hoping that the faucet can be loosened a bit. Want to know how macroeconomic policies affect the gambling industry? PASA official website continues to track the intersection of the industry and the capital market.
1. Interest Rates and Stock Prices: Why are gambling stocks underperforming the market?
In the past year, despite the US stock market's major indices repeatedly reaching new highs, the gambling sector generally performed poorly. Several industry giants saw significant stock price declines:
Aristocrat Leisure: -31%
Caesars Entertainment: -43%
DraftKings: -51%
Evolution: -25%
Flutter: -57%
Genius Sports: -34%
Penn Entertainment: -41%
Playtech: -45%
Chad Benyon, Macquarie's head of gambling industry, explains that stock prices are driven by two major factors: earnings expectations revision (economic improvement, consumer recovery) and valuation multiples. Interest rate cuts usually push up valuation multiples, which is exactly what the gambling industry currently needs. Since Trump's return to the White House in January 2025, the Powell-led Federal Reserve has cut interest rates three times (each by 25 basis points), reducing the interest rate from 4.5% to the current 3.75%, but gambling stocks have not yet seen significant benefits.
2. How do interest rate cuts affect gambling companies?
1. Relieving the pressure on sale-leaseback operators
Companies like Caesars, Penn, and Bally's obtain cash flow by selling and leasing back properties, used for project financing or debt repayment. This model can become problematic during performance slowdowns. Benyon believes that if interest rate cuts continue, these operators will be the biggest beneficiaries. In contrast, companies that still own property rights, such as Wynn, Red Rock Resorts, and Boyd Gaming, have seen their stock prices rise by 20%, 18%, and 10% respectively over the past year, far outperforming their peers.
2. Stimulating the M&A market
Low interest rates typically stimulate merger and acquisition activities, thereby boosting corporate valuations. Frank Fantini, founder of Fantini Research, points out that investors are looking for reasons for rising valuations, and mergers and acquisitions are one of them. In recent years, several large acquisitions in the gambling industry have been led by private equity, such as Apollo's acquisition of The Venetian Resort and CVC's acquisition of Gaming Labs International. Lower financing costs may make the M&A market more active.
3. Reducing debt burden
According to data from New York University, the gambling industry's average debt/EBITDA multiple is 5.3, significantly higher than the market's non-financial sector average of 3 times. Benyon states that many companies struggle to "grow out of high leverage," and interest rate cuts will directly aid in debt refinancing and rating upgrades.
3. Will Powell's feud with Trump affect the transition?
As Powell's term approaches its end, his relationship with Trump has become increasingly tense. The president has tried to exert unprecedented pressure on the central bank, and in January this year, the Justice Department even issued a subpoena regarding Powell's previous testimony about the Federal Reserve headquarters renovation costs. Powell responded firmly: "This is because I set interest rates based on public interest, not in accordance with the president's preferences."
Tom Tillis, a member of the Senate Banking Committee from North Carolina, warns that if this issue is not resolved, all Federal Reserve nomination procedures will be put on hold. "If the independence of the Federal Reserve is compromised, the economic consequences will be disastrous." It is worth noting that Powell's term as a Federal Reserve governor will continue until January 2028, and he may break the tradition of leaving office after stepping down as chairman, remaining as a governor.
Currently, Warsh's nomination hearing has not yet been scheduled.
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This article is from "PASA-Global iGaming Leaders," a gambling industry news channel: https://t.me/pasa_news
Original in-depth gambling channel: https://t.me/gamblingdeep
Free data reports: @pasa_research
PASA Matrix: @pasa002_bot
PASA official website: https://www.pasa.news
