Charting a “slow bleed” across regional casino properties, Deutsche Bank analyst Carlo Santarelli concluded today that on balance, outlying casinos are “broadly out of favor with investors,” who expect more negative than positive revisions to earnings projections.
Recent history, Santarelli reported, shows that 2023 is difficult for earnings comparisons relative to what had been expected and forecast for the gaming group. Currently, operators are said to be tracking below Wall Street’s consensus for the second quarter, although a better-than-anticipated June may shore up the numbers.
Santarelli called 2023 revenue trends in regional gaming “the weakest comparisons investors have seen in some time.” He attributed this to a trifecta of factors, starting with less discretionary spending by consumers. An unfavorable calendar in April and less time for players were also blamed.
Although net-revenue performance is described as weaker than last year’s, profit and cash-flow are margins are deemed unlikely to deteriorate beyond first-quarter diminution. Also, promotional offers as a percentage of gross gaming revenue are reported by Santarelli to be outstripping 2019, but flat compared to 2022.
Year-over-year comparisons aside, Santarelli chronicled, consumers are still spending 30 percent to 35 percent more on gambling than they did in 2019, before COVID, in spite of floor traffic that remains 20 percent below 2019 levels. Santarelli thinks most of the declivity is at the low end, with all remaining demographics spending slightly more.
“With inflation cooling, real wage growth could potentially flatten out in the absence of a recession,” Santarelli cautioned, “something we believe would be a modest net positive for the group, given the historical [gross gaming revenue] performance in expanding real-wage-growth environments.”
He deemed the gaming-revenue growth seen last year as exceptional, compared to 2019’s. He also cited the 2010-2022 era as one of “negligible growth” for most regional casino markets. “Meanwhile, the household balance sheet has, for the past two-plus years, been a source of comfort for the gaming industry, as accumulated household savings remained elevated.” Thus, the buildup of such money, and stimulus benefits, redounded to the industry’s benefit after the pandemic.
Even so and even as savings rates are sharply on the downturn, gambling spend has continued to grow across Santarelli’s sample group of companies “and accounted for ~2.6% of household savings flow for the year.” This was comparable to the 2010-2013 era and meaningfully above 2014-2019.
What does this mean for individual companies? In the case of Boyd Gaming, its Mississippi and Louisiana casinos continue to track roughly five percent below where they were last year. Santarelli projects $511 million in second-quarter net revenue for Boyd’s Midwest and South casinos.
The shortfall for Caesars Entertainment will be much larger, Deutsche Bank projections say, on the order of $48 million. The blow is softened by an expected six percent June uptick, thanks to recent property openings in Virginia and Nebraska, among other factors.
Penn Entertainment split the difference, being forecast for a $26 million slippage. A rebound at Hollywood Detroit and easier year-over-year comparisons will mean a revenue-positive June for Penn, Santarelli says.
Lastly, MGM Resorts International will come up $9 million short regionally, though new upgrades at Borgata in Atlantic City will help make for an upbeat June. So far, regional underperformance for MGM is just under two percent.
