“It’s the economy, stupid!” was the headline on an April 23 investor note by Truist Securities analyst Barry Jonas. Noting that gaming is “among the best positioned sub-sectors within a perhaps more mixed consumer sector,” he nonetheless said that prudence suggests lowering price targets on gambling stocks.
Jonas continued that he saw bargains everywhere within the gaming group, but favored companies whose cash flow is stable. To that end, he recommended real estate investment trusts (REITs) Vici Properties and Gaming & Leisure Properties.
Among gaming stocks, he liked Churchill Downs and Monarch Casino Resorts for their asset quality. Digital-only stocks DraftKings and Flutter Entertainment also enjoyed Jonas’s favor.
The analyst kept Buy ratings on Caesars Entertainment and MGM Resorts International, in part because they were trading at their lowest post-COVID prices. He explained, “Investors are expecting the worst for the consumer.”
Even so, Jonas found first-quarter trends “seem fine,” casino managements were still upbeat, and room rates have not slowed significantly. For historical context, he pointed out that a 35 percent plunge in Las Vegas casino cash flows during the Great Recession of 2008 came at a time when the massive new capacity was coming on line in the city and when the federal government was discouraging Vegas visitation.
“Still Las Vegas is more exposed to international visitation,” Jonas warned, citing Canada and Mexico (whose combined U.S. visitation dropped 11.6 percent in March). He suggested that U.S. customers might make up the shortfall if they scrap pricey European trips in favor of cheaper Las Vegas ones. But “Vegas is certainly not as cheap as it once was.”
Even so, Jonas felt Caesars and MGM to be insulated, to the extent that their share prices more than fully reflect current economic risks.
He continued that regional casinos had been “meaningfully hit” in their stocks by a trifecta of economic factors. These included consumer anxiety, adverse weather in January, and the loss of a February day compared to 2024’s leap year.
Citing Monarch’s first-quarter performance, Jonas believed, “Underlying trends are fine otherwise. … Still there is real concern about consumer behavior with a lower stock market and rising inflation.”
Looking at Great Recession data, Jonas found that regional casinos would be more resilient, in part due to their lack of international exposure. He also felt that consumers would trade down destination travel in favor of regional staycations.
“While we see some risks around capex/new construction budgets increasing … we also see that balanced conceptually by decreasing risks around new supply further cannibalizing existing supply, amidst undemanding valuations across the sector,” the analyst wrote. In addition to Monarch and Churchill Downs, he cited Boyd Gaming on the strength of its balance sheet.
Turning to cyberspace, Jonas observed that online gambling “hasn’t been spared the recent carnage.” Among the causes of the bloodletting was an adverse March Madness on the heels of the most sports book-hostile NFL season of the past 40 years.
Other threats on the horizon were diminishing handle, potential state-level tax increases, and the ascent of prediction markets. Should the latter prevail, Jonas predicted that online sports betting operators would join them, enabling the OSB sector to raid Texas and California, both currently off-limits.
Jonas explained his favorable view of Flutter and DraftKings by saying that hold percentages were sure to improve and the current, high-hold, parlay mix was very good. He added that a recession might not hurt OSB, as 80 percent of the wagering is done by high-end players and a need for more state revenue might spur additional legalization of igaming.
As for REITs, they were described as a safe harbor for investors so far this year, as GLPI and Vici have defied the market, up two percent and 12 percent respectively at a time when the S&P index was down 11 percent. “REIT cash flows have weathered multiple storms with limited impact,” noted Jonas. He added that the deal activity he expected this year “could be limited until there is more certainty around the macro [economy] and interest rates.”
On the one hand, due to tariffs, gaming technology was seen by Jonas as the most exposed sector. On the other hand, he cautioned that multiple uncertainties made tech “a moving target.
Jonas thought the risks in potential mergers or acquisitions were minimal, however. He awaited the resolution of International Game Technology’s lottery bid in Italy and Light & Wonder’s May investment targets. He noted that three-year targets might be far enough into the future to override any near-term economic uncertainty.
