Las Vegas is on track for the best top-line growth in gaming demand in 2024 with the strength in the luxury brands on the Strip, according to Bank of America gaming analyst Shaun Kelley.
In BofA’s investment outlook for 2024, released Monday, five gaming stocks were rated buy, four neutral, and three underperforming.
“Gaming stocks are back to trading in line with both mid-cycle and long-term average levels after dislocation cited back in November,” Kelley wrote in a note to investors. “However, a soft landing and Fed pivot should still be good for gaming. Free-cash-flow yields are high and attractive if rates have peaked. Macau is the most attractive versus long-term average, but visibility is the lowest. The Fed narrative applies less and our read of the macro still leans cautious.”
Kelley focused on Las Vegas, where he said demand is strong, with room rates up 5% year over year in the first quarter.
“Group events such as the Super Bowl and international play, especially baccarat, should help the high-end properties, but there is some sign of demand fatigue in core gaming at the low end,” Kelley said. “We estimate margins will see some pressure of around 50 to 100 basis points, primarily on inflation and the new union contracts going into effect.”
Kelley expects EBITDA to be flat or slightly down, with Wynn Resorts faring best at the high end, driven by market-share gains and continued recovery in international visitors and high-end baccarat play.
BofA projects 2% growth in gaming revenue in Las Vegas in 2024 compared to 1% for regional gaming.
“Lackluster is the name of the game,” Kelly wrote. “Regional gaming saw just 1% growth in gaming revenues overall in 2023 with same-state revenues declining 2%. Only four states were positive (Alaska, Kentucky, Illinois, and Massachusetts), with Alaska, Kentucky, and Illinois benefitting from new supply additions. We expect a similar anemic environment in 2024, with some modest margin erosion, as solid cost controls meet the realities of multi-year inflation pressure. New supply growth is expected to be about 3%, but is very weighted to the second half of the year and some competition, particularly where tribal or new operators are trying to get established.”
Macau is projected for 20% growth in gaming revenue, but just 4% from the fourth quarter of 2023, Kelley said.
“Macau will likely be the most volatile in 2024 and is the hardest to underwrite. While upside expectations are coming down, we think Macau optimists still outweigh pessimists. A China re-acceleration would be hugely positive at current valuations, but we think slowdown and hard landing risks are being overlooked.”
As for online, Kelley expects an 18% increase in gaming revenue in 2024, though performance could be back-half loaded as full valuations, share shifts, and promo fears in the first half (BetMGM, ESPN Bet, Fanatics) give way to more profitable business models and leverage on fixed costs in the second half.
“Fundamental growth should continue to be driven by the combination of new states legalizing (North Carolina, Vermont, Kentucky, and Maine), existing states ramping productivity, and positive mix shift to higher-holding parlay games,” Kelley said. “New entrants (ESPN Bet, mostly) could also help grow the market with new audiences, but run the risk of rejiggering market share. 2024 should also see a material inflection to profitability for FanDuel, DraftKings, and Caesars, with BetMGM and Penn/ESPN Bet following in 2025 and 2026, respectively.”
MGM Resorts could be the center of a story that could dominate in 2024, Kelley said. It could seek resolution of the BetMGM joint venture for its 50%-owned stake with Entain.
“Recall, Entain’s CEO stepped down and an activist joined the board in January,” Kelley said. “One scenario of many is MGM looks to buy a stake in the remainder of BetMGM, which would trigger consolidation, with a path to full control down the line. Additionally, MGM could agree to a likely temporary licensing fee for Entain’s technology. We outline potential valuation scenarios, but would see an initial check size of a billion dollars as reasonable. Financially, a deal would likely be dilutive, but strategically important, as it gives MGM control of their digital destiny, improves future growth and free-cash-flow conversion, and could increase execution certainty at BetMGM.”
Penn Entertainment is ramping up its November launch of ESPN Bet and, like Entain, has an activist shareholder in H.G. Vora, who now owns and controls a material 18.5% interest, Kelley said. BofA upgraded shares of Penn in December on better-than-expected initial cut-through of the ESPN Bet app.
“Initial state-market-share figures are encouraging — trending to 9%-10% — but what makes online gaming work is retention and this remains a big proving ground for Penn in 2024,” Kelley said. “We see the primary catalyst as better integration of ESPN Bet directly into ESPN’s app with the launch of BetMode by the Super Bowl this year, but also look for further product improvement and a more visible marketing campaign in the first half of 2024.”
DraftKings will turn EBITDA and free-cash positive in 2024, which Kelley said is a big milestone. However, the first half of 2024 could be volatile, as investors are concerned by upcoming competition, including the recent launch of ESPN Bet, Bet MGM’s renewed promotional focus, and a new U.S. listing from Flutter.
“We think the second half could present more of an opportunity, as ramping platforms start to focus on profitability, particularly if aggressive investments do not pay off. We’re confident in DraftKings’s execution, as well as its size, scale, and upcoming cash generation starting to insulate its competitive moat. With double-digit growth likely for the next several years and material upside to our existing estimates and total addressable market while maintaining a healthy growth multiple, we think this can result in shares rising to the mid-40s (+40% from here) in the next 12 to 18 months.”
Deleveraging via asset sale of Centaur Holdings, Caesars Entertainment remains one of the higher risk-reward equities in their coverage and underperformed the risk-on rally to end the year, Kelley said. In 2024, Caesars could see a step-function catalyst in the anticipated sale of Centaur to VICI Properties.
“We expect this sale to raise nearly $2 billion in net proceeds that should reduce traditional and lease-adjusted leverage below five times and close to their targeted range,” Kelley said. “Coupled with accelerating free cash flow as identified project capital plans (New Orleans and Danville) come to an end, Caesars could be worth watching as leverage risks fade.”
Red Rock Resorts will be focused on ramping its Durango Casino & Resort opening in December. Early reviews and traffic indications are positive and Kelley said that puts the property on target to achieve or exceed $150 million-plus of EBITDA and a strong, near 20%, internal rate of return.
“It is still unclear the level of impact that Durango could have on existing Red Rock properties, most notably Red Rock in Summerlin. While our model assumes some cannibalization, even assuming zero, Red Rock trades at a 20% premium to the sector and above theoretical valuation after its strong rally (likely on Durango optimism) to end the year.”
Boyd Gaming has done everything right from a capital-allocation standpoint, with both the highest FCF share growth since the pandemic and the lowest net-leverage level in gaming.
“While catalysts are lacking, Boyd has an 11% free-cash-flow yield, low debt (with M&A potential), owns most of its real estate and a 5% ownership in FanDuel, all of which seem undervalued,” Kelley said. “Solid execution, plus a sustainable capital-return program, should drive a healthy high-single-digit (7%-8%) return even with zero growth.”
