“Waiting for Godot” was how Truist Securities analyst Barry Jonas characterized the current wait-and-see attitude toward macroeconomic concerns as they affect the gaming industry.
He began his note to investors by saying that he expected 2022 to demonstrate the underlying strength of gaming and indeed it did. However, “It also showed how valuation and fundamentals can diverge in a forward-looking (or fearing) market.” His expectation for 2023 is for “slightly” softer underpinnings.
Jonas believes that 2023 might even be stronger in terms of cash flow, driven by a puissant Las Vegas calendar of events and by growth in the digital sphere. “Overall,” he penned, “gaming has proven its resiliency time and time again and we don’t expect this year to be much different.” His central question is how much of that tensile strength is already baked into Wall Street’s valuations of the gaming group.
In general, Jones foresees no major retrenchment in 2023, coupled with “lots of compelling valuation” in his coverage landscape. He predicts both a strong start and finish to the year for Las Vegas, thanks to an upturn in business and convention travel, as well as the potent event slate mentioned earlier.
Regional casino markets, however, “grew ~+5% in 2022, but could blink first in 2023 if the consumer fades while more competition is coming. Still, the 2008 playbook would see local gaming bounce back quicker than destination,” Jonas wrote, in an allusion to the Great Recession, which laid markets like Las Vegas low.
Even so, he said, gaming stocks “should warrant a multiple premium,” with softness in gaming less than in other consumer-facing industries. Also, the transition of igaming entities from loss leaders to profit centers (as BetMGM and Caesars Sportsbook are expected to become in this year) should further shore up gaming’s bottom line, a “cushion for any land-based softness.”
Companies that Jonas particularly likes are MGM Resorts International and Caesars Entertainment, thanks mainly to their Las Vegas-centric presence. Boyd Gaming received kudos for its valuation and profitability (in conjunction with FanDuel) in the igaming sphere. Other companies receiving positive recognition were Monarch Resorts for a potential shift back to paying dividends and Bally’s Corp. and Penn Entertainment for geographic diversity, as well as “better than expected trends/contrarian plays.”
Rising debt ratios and a heavy development slate accounted for Station Casinos downgrading to Hold status, where it will keep company with DraftKings “as we await profitability” from the sports-betting giant.
Jonas is a fan of gaming REITS, which he said have proven their resiliency in the COVID era, when they achieved virtually 100 percent rent collection. He looks for this asset class to “prove itself through rising interest rates — a traditional weakness for [long-tenured] triple-net lease companies.” However, he believes interest-rate worries were relatively for naught against dividend payments and the general investment safety of REITs.
Gaming & Leisure Partners was upgraded to Hold, as “management continues to execute on deals to drive accretive growth.” Vici Properties (“best-in-class”) remained a Hold, “given its increasingly diverse tenant base,” which includes both MGM and Caesars, “expansion into non-gaming, high mix of [Consumer Price Index]-based escalators, as well as a visible and defined growth pipeline.
Regarding the manufacturing sector, Jonas remained “very positive,” particularly after seeing the quality of new game content (which he believes will drive sales) at Global Gaming Expo last October. Further spurring slot sales, he wrote, is “a growing thesis around correcting slot-floor mismanagement calls for an accelerated replacement cycle (we expect to finally top 2019 levels this year) and a higher mix of participation devices,” long shunned by casinos. Cashless gambling is expected to continue its ascendancy, supply-chain issues should continue to dissipate, and “largely beaten-up valuations [reflect] an outlook much worse than reality.”
Current trends in lotteries (upward) led Jonas to favor Buy-rated International Game Technology. He also liked Light & Wonder’s double-digit cash-flow growth, Everi Holdings’ spread of cashless-gaming technology, as well as AGS for the prospects of further growth of tribal gaming in Texas.
