Jefferies analyst David Katz dissented from some consensus views in the gaming-coverage universe in an 86-page report published today. He called Macau-facing companies “oversold,” using the same term to describe U.S. regional giant Penn Entertainment.
Unlike some of his colleagues on Wall Street, Katz views “the casino stocks less favorably than other areas of our coverage,” convinced that a recession is in the offing. He cited challenging comparisons with previous years, macroeconomic concerns, and competitive pressures as reasons for his assessment.
The one market on which Katz was bullish was Las Vegas, particularly the presence of Caesars Entertainment. By comparison, recent cyberassaults “challenge the investibility of MGM [Resorts International] in the immediate term.” Station Casinos also “should benefit from economic strength” and its new Durango Resort.
Churchill Downs was Katz’s long-term pick in regional gaming, one whose “prospects for long-term growth are unmatched in our coverage.” Penn was “a positive near term set-up,” thanks to the announcement of ESPN Bet, for which the analyst detected “enthusiasm.” As for outlays on digital gambling, of which Penn has more than Churchill Downs, it “should be a matter of debate.”
Katz wrote, “Post COVID, the upside to volumes was driven by pent-up demand, government stimulus, and cost controls, all of which have somewhat normalized.” Consequently, that leaves expansion into new markets and property enlargements as a means of growing revenue.
As for Macau, Katz allowed that the market “could surprise one way or the other,” but cited capital commitments for non-casino attractions by the six concessionaires as a potential impediment. These “mitigate the path to peak margins,” which at Macau’s zenith stood at 13 to 15 times cash flow.
Looking at Macau’s future, Katz predicted the enclave “should not recover to 2019 levels and is inherently limited by the capital-spending requirements of new, shorter, concession agreements. Ultimately, the domestic and China economies cast a shadow over the next several quarters, in our view, which tempers our enthusiasm for the [gaming] group.”
Turning from the Cotai Strip to the Las Vegas Strip, Katz forecast negative-cash-flow growth next year for Caesars, MGM, and Wynn Resorts, but not for Bally’s Corp.’s Tropicana, “expected to grow off a low base for the company.” The Jefferies boffin predicted a 3.1 percent cash-flow decline in 2024, followed by a 2025 recovery, “after the expected recession concludes and margin pressures normalize allowing for organic growth.”
By contrast, Las Vegas locals play is expected to generate six-percent cash-flow growth next year, led by a Durango-energized Station with a 12.7 percent increase. Katz then turned his attention to individual companies, as follows.
Bally’s Corp. should be buoyed by three events: the opening last month of its temporary casino in Chicago, the impending demolition of the Tropicana to make room for a baseball stadium, and the consequent clearance of the site for a new hotel-casino as well.
Boyd Gaming is a company on which Katz was cautious, as it’s mostly regionally exposed and its casinos have “struggled to generate growth in 2023.” Katz specifically cited Boyd’s performances in Indiana, Ohio, and Louisiana, where revenue declines have been five percent or worse. “Las Vegas locals, however, is stronger given the economic set-up in the area,” he added,
Caesars Entertainment received a “Buy” rating from Katz. Caesars “appears to have avoided significant impact to its business from the cyberattack, which should be confirmed in the coming months. From a business perspective, the strength in Las Vegas should more than offset the cost impact from labor pressures,” Katz wrote, adding that profitability in igaming and sports betting would make up for “the moderate weakness” of regional casinos.
Churchill Downs’s $1 billion in casino, racino, and slot-parlor expansions, believed Katz, “will offset the inconsistent regional gaming results, rising operating costs and isolated increased competition.” He reiterated his “Buy” rating, citing new product in Virginia and Kentucky as drivers of greater revenue and adjusted cash flow.
Golden Entertainment will either acquire or be acquired and soon, Katz deduced, thinking it more of a buyer than a seller. He saw Golden as “confronting the challenge of plotting its next course of value enhancement, with its current assets focused in Nevada and its balance sheet below optimal levels.” Despite the opening of Atomic Golf at The Strat in Las Vegas and continued enlargement of its Nevada tavern business, Golden’s prospects didn’t glimmer sufficiently to prevent Katz from shaving two dollars off its price target of $41.
Las Vegas Sands was hampered, in Katz’s view, by the extent of the Macanese recovery, still only 70 percent of pre-COVID revenue volume. “Visitation limitations imposed by the government ahead of the highly anticipated Golden Week will also impact the company’s ability to make a full recovery.” Katz admitted to limited visibility into the extent to which old high-roller-junket business was being redistributed into the mass-market and premium-mass segments. Singapore was a bright spot, with augmentation of Marina Bay Sands anticipated to enhance cash flow to the tune of $250 million.
MGM Resorts International’s current labor talks caused Katz to frown (“a modest impact to profitability … a mild negative”). Still, he believed the impact of the Sept. 10 cyberattack would ultimately be covered by insurance and that both labor and cyber costs were already baked into the share valuation, “and the positive prospects for Las Vegas, Macau recovery, digital profits, and other growth opportunities should drive value longer term.” Katz maintained a “Buy” on the stock.
Penn Entertainment, unlike Caesars and MGM, didn’t inspire Greff to enthuse about its igaming and sports-betting operations. He penned that the introduction and ramp-up of ESPN Bet “are more challenging, given the strength of existing top shareholders in the current landscape.” As for Penn’s extensive regional portfolio, Katz called it “largely stable,” but said it offered little support for an upside view.
Station Casinos was deemed a “Buy,” but Katz posited that it would stand or fall by the performance of Durango Resort, this despite being “a beneficiary of strength in the economy of the Las Vegas valley.” The new casino “adds a growth element to the story that most others in the sector do not have.”
Wynn Resorts suffered a bit from Katz’s Macanese caution. “Our view is that the recovery in Macau is underway and somewhat gradual, but ongoing,” he wrote. Katz predicted that “the pressures on the China macro [economy] on Macau could continue to temper the upside in the shares.” The analyst lowered his price target on WYNN stock all the way from $118 per share down to $104. This was partly due to the termination of most WynnBet operations, to which a dollar of share value had been ascribed.
