DraftKings will beat expectations, while ESPN Bet will fall short, when earnings are reported for the first quarter, according to an investor note released Monday by Bank of America Global Research.
Analyst Shaun Kelley highlighted sports betting in his preview before the gaming industry releases its first-quarter earnings later this month and in May. He also warned that regional casinos, such as Caesars Entertainment, will take a hit in the first quarter, due to poor weather in January, and indicated that Boyd Gaming will face limited cannibalization from the opening of the Durango Casino & Resort.
Kelley highlighted the most topical points when earnings are released, according to B of A. He started with DraftKings, suggesting it could beat first-quarter net-revenue guidance by about $70 million and adjusted earnings by $35 million to $40 million.
“The first weekend of the March NCAA tournament had some unfavorable outcomes with hold, but we think the impact is limited ($10 million to 20 million) versus larger swings for a comparable NFL weekend,” Kelley said.
For Penn’s ESPN Bet, the first quarter will come down to March, but Kelley said he sees results coming in below expectations and guidance, due primarily to lower hold and higher promotions driving lower net-gaming revenue.
“We now think ESPN Bet could lose about $200 million in the first quarter versus management’s $170 million on revenues of about $75 million,” Kelley said. “Without an accelerant, we see second and third quarters at risk and current share implies fiscal-year revenue guidance of $680 million to $815 million could be optimistic.”
ESPN Bet’s daily-active-user share remains in the high teens and has inched up since February, but “monetizing this strong engagement will be crucial to getting numbers back on track,” Kelley said. “Despite higher losses, we reiterate buy on Penn given an asymmetric risk reward with ESPN Bet.”
In addressing regional casinos, Kelley said that after the fourth-quarter earnings and March conferences, investors understand January was a challenging month given poor weather. The trends improved in February, but even after adjusting for an extra day, the data showed a slight year-over-year decrease.
Based on state reports through February, Bank of America estimates same-casino regional revenue tracking down across the board: 12% at Caesars Entertainment, 6% at Penn, 5% at MGM Resorts, and 4% at Boyd.
“We think trends improved more in March with Placer (geolocation data) visitation up 6% versus up 2% in February and down 8% year over year in January, but early Easter timing could weigh on the final week of the first quarter,” Kelley wrote. “We lower our regional estimates and see Caesars as most at risk to miss estimates. Reiterate neutral on Caesars Entertainment given choppy regional trends and market share loss.”
Finally, B of A analysts continue to believe that Red Rock Resorts’s Durango opening has had a smaller cannibalization impact on the company’s Red Rock Casino and Boyd’s Orleans than originally anticipated. Based on Placer geolocation data, visitation to Red Rock was down 3% year over year in the first quarter, while foot traffic at Orleans casino was up 2%, Kelley said.
“We think Durango is performing well. Visitation to Durango is evolving similarly to how we expected and in line with the maturation of other casino openings. We think Durango is on track to reach/exceed a 10% return on investment or $80 million of net incremental EBITDA in year one.”
Kelley said if cannibalization impacts are about half of their initial expectations, there is about a 2% upside to their Boyd locals’ estimates for fiscal-year 2024.
“We are raising our Las Vegas locals’ estimates for Boyd and Red Rock to reflect less cannibalization and raise our Red Rock Resorts (price) to $57 from $52,” Kelley said. “We reiterate buy on Boyd and underperform on Red Rock Resorts, both based on valuation.”
