Atlantic City casino gambling

For a couple of years I was an adjunct at Rutgers business school.  I worked on a course where teams of MBA students provided management consulting services for actual companies.  For one project, one of my teams interviewed a pizza parlor owner about the key characteristics of his restaurant that attracted business.  He said:  good food, extensive menu, fast service, friendly staff, tablecloths on the tables.  These enabled him to get customers from as far as 7-8 miles away from his store.

How close was the nearest competitor?   …15 miles away.

All of the attributes he named may have been important to get any customers to his restaurant, but it’s hard not to think that distance is key to defining his market area.  That’s true of any generic bricks-and-mortar business.

…which brings us to Atlantic City.

That beach resort has had its annual gambling revenue cut in half since competing casinos began to open in neighboring Pennsylvania in late 2006.  Additions in Maryland and Delaware haven’t helped, either.  The issue is the same as with pizza. Absent some incredible attraction (think:  Las Vegas), the average gambler will typically choose the closest casino to patronize.

The response of government in New Jersey to the competitive threat has been quite odd, in my view.  It hasn’t been to build up the city as a resort destination or to improve transportation access.  The main thing I’ve seen has been the attempt several years ago to help yet another casino, the Revel, to open, adding new slot machines and table games to a market already awash in overcapacity.

Potential good news is that, after the closing of four casinos (Atlantic Club, Revel, Showboat and Trump Plaza) in 2014, the market appears to have stabilized.  Even online gambling is perking up, having brought in $16+ million in April (although this is still a far cry from the $80 million average monthly take the state had been touting when online was legalized).

The other side of the coin is that Trenton is again “helping” Atlantic City by opening the door to building two new casinos in northern New Jersey.  Local voters will vote on proposals later this year.  Maybe the idea is to stabilize the state’s gambling tax revenue at any cost.  But nothing seems to me more likely to snuff out a nascent recovery in AC than this.


Tesla (TSLA)’s new common stock offering

the motivation

TSLA has been surprised and pleased by the public response to its proposed new Model 3 (the company has reservations–and deposits of $1,000 each–nearly 400,000 units for a car slated to appear in limited numbers next year or the year after).  …so much so that it has junked its plan to become cashflow breakeven this year (meaning operations would no longer consume cash and might generate it).  It has decided instead to accelerate its factory building to speed the debut of the Model 3.

To do so, it needs fresh capital.

the offering

So, for the third time in three years TSLA is having a public offering.  In a preliminary prospectus revision filed today, TSLA indicates it intends to sell 9.3 million new common shares at a price of $215.  Of that number, 2.8 million are being sold by Elon Musk to pay taxes due on exercise of options on 5.5 million new TSLA shares. The underwriters have the right to sell an extra 1.4 million shares in what is called an “overallotment.”

When the dust clears, TSLA will have raised between $1.4 billion and $1.7 billion and will have about 145 million shares outstanding.

Press reports indicate the offering has occurred today, even though the prospectus says underwriters expect the offering to happen next Wednesday.

my thoughts

–the prospectus contains the most up-to-date data on the company

–the new money will allow TSLA to being volume production of the Model 3 in 2018 instead of 2020

–I’d be a little miffed at the offering price if I had participated in the 2015 stock offering at $242 a share, or bought convertible bonds in 2014 with a conversion price of $350.  Neither, of course, makes any difference for new buyers

–if the press reports are correct, that hasn’t mattered too much to the investing public, either

–I wonder how much retail participation in the offering there is.  Lack of institutional support is usually a bad sign, although I’m not so sure that rule holds true here

–TSLA could barely get off a stock offering half this size last year

–achieving a stock sale like this almost always marks a near-tern bottom for the stock price

–dilution of existing shareholders is minimal and bringing forward the volume launch of the Model 3 by two years is probably a very big positive thing.  So, if the Model 3 is the success it appears to be, the offering will have been good for everyone.







dividends in the US (iii): the 1990s

The most important factor in the performance (or lack thereof) of dividend stocks during the 1990s came at the end of the decade, during the Internet mania.

What were called at the time Technology, Media and Telecommunications (TMT) stocks exhibited exceptionally strong performance for several years, despite the fact that prices were wildly high for much of that time and that many newly-minted members of the club had dubious fundamentals.  The fever was fueled by loony research reports by figures like Henry Blodget of Merrill (subsequently banned from the securities business, now writing on finance for Yahoo) and Mary Meeker of Morgan Stanley (now with Kleiner Perkins).  It also featured the takeover of AOL by Time Warner, which must be one of the most calamitous financial combinations of all time.  These outsized gains came at the expense of the rest of the market, particularly value (i.e., low PE, low price/cash flow, low price to assets issues).

So dividend stocks took another beating, a là the late Seventies, setting them up for a strong run of outperformance once the speculative bubble collapsed.

Tomorrow, the present.

dividends in the US (ii): the 1980s

The 1980s were the inverse of the 1970s as far as dividend stocks are concerned.

Dividends were back in!!

Three factors were involved:


Paul Volcker was appointed as chairman of the Federal Reserve in 1979, with a mandate to break the inflationary spiral that was under way in the late 1970s–and which was poisn for dividend stocks.  He did so by raising interest rates sharply, thereby causing a deep recession in 1981-82 that erased the persistent belief that prices would be able to rise in an uncontrolled way.  Disinflation, slow but continuously reduction in the level of inflation, replaced accelerating inflation as the watchword of the 1980s.

As the rate of change in the price level slows, the ability to raise prices by, say 4% – 5% annually (and therefore profits and dividends) becomes progressively more valuable.  So the stocks that exhibit these characteristics become worth more as well.

commodities price declines

To the degree that the price of commodities inputs stabilizes or falls, and a firm is not forced to pass these savings on to customers, profit growth is enhanced further.


Dividend stocks–mature companies with slow-but-steady growth and substantial free cash flow–were crushed in the inflation-fear frenzy that characterized the late 1970s. After the worst of the ensuing 1981-82 downturn, investors began to notice how startlingly cheap stocks sporting, low PEs,  10% dividend yields and offering moderate growth were.  Adding 5% in earnings growth that causes a 5% rise in the stock price to a 10% yield would produce a 15% total return.  That’s without the higher risk attendant on holding a more cyclical name than a public utility or a cereal company.  And it ignores the possibility that the PE might rise.

The success of dividend stocks in the 1980s was not about a change in investor preferences–that would come after the turn of the century.  This was all about valuation + change in the direction of monetary policy.


Tomorrow, the 1990s.