Gambling’s growth potential lies in the digital sphere, as demonstrated by MGM Resorts International and Caesars Entertainment. That was the take of Jefferies Equity Research analyst David Katz, as outlined in an August 3 investor note.
Katz took heart in what called the fundamental strength of Las Vegas and in online growth. Earnings calls the previous week “presented issues of growth, capital allocation, leverage and execution, with valuation largely irrelevant.
“Growth in gaming is hard to come by, but it is evident in the digital improvement” of Caesars and MGM, Katz reported. However, Wall Street isn’t crediting companies for their online performance unless other sectors are performing too, he found.
The analyst elaborated, “Near-term concerns about Las Vegas Strip weakness and, in the case of Caesars, regional negative productivity are offsetting digital acceleration.” But he felt that if the performance on land-based assets sank enough, Wall Street might look more warmly toward igaming and online sports betting.
Two other companies Katz admires are Station Casinos and Vici Properties. Of Station, he wrote, “It is a standout, with outperformance despite capital investment disruption, with the stock reaction (+10.3%) warranted.” Vici was hailed for low-risk returns and medium-term growth.
Of Caesars, Katz wondered “whether the land-based operations and capital allocation can stabilize enough to allow for digital stock credit at practically any valuation level.” Online performance improved 100 percent, he said, but Las Vegas and regional casinos missed their projections.
“In our view, Las Vegas is cyclical but upward-trending in the long term, while regional gaming becomes more complex and competitive,” Katz forecasts. He said that Caesars had industry-leading assets but needed better operational execution. Although Katz found near-term estimates of Caesars’s performance to be sufficiently cautious, he questioned putting $100 million into stock buybacks.
Las Vegas was also a drag on MGM, Katz wrote, overshadowing potent growth both online and in Macau. Even so, he felt a revamp of MGM Grand on the Las Vegas Strip is a positive long-term investment. “Meanwhile, BetMGM has found its groove … and Macau has stabilized, although neither is wholly owned by MGM, which limits the stock benefit.”
Speaking of stock, Katz also wished that MGM were putting money into reducing leverage instead of share repurchases. That said, he remained impressed by MGM’s assets and capital allocation.
In spite of construction-related upheaval at Station’s Vegas properties, Katz found them to be performing better than anticipated and “external investment in the portfolio remains [Station’s] hallmark.” The company’s valuation— a sector-leading 11.5 times cash flow — is justified by the performances of Durango Resort Sunset Station, Green Valley Ranch, and the prospects for its North Fork Rancheria project in California.
“We have concerns about the near-term quarters in Las Vegas, coupled with disruption, suggesting that a tempered view is prudent,” Katz cautioned.
Of Vici, the only real estate investment trust in the mix, he found its second-quarter results uneventful. “The prominent issue is the inherent growth in revenues and therefore dividends, which are simply appealing compared with the complexities across gaming,” Katz opined.
What Katz called “inorganic growth options” for Vici, not only in gambling, were likely to play out, he thought. He added, “The longer-term circumstances of rising rent and falling earnings for specific tenants could require thoughtful solutions, which we count on Vici to provide.”
Katz repeated Buy recommendations on Caesars, MGM, and Vici. For Station, however, he stayed at Hold.
