Third-quarter earnings wrapped up last week for the gaming industry and the reviews are in: Revenues exceeded expectations and not only aren’t casinos facing the inflationary pressures that some feared, but they’re already setting records to start the fourth quarter.
The wrap-up from Bank of America analyst Shaun Kelley noted one blemish: margin performances were mixed. Even so, gaming stocks have been a relative outperformer so far during the fourth quarter, up 5% versus the S&P 500, up 18% versus retail, and up 14% versus discretionary, Kelley wrote last week in a note to investors.
“The bottom line (for Las Vegas) is margins are down sequentially, but October is at record levels. The regionals have better than expected revenues, with margins flat or up sequentially, other than MGM Resorts International.”
Kelley said digital gaming had a better hold in September and more rational promos driving strong third-quarter results.
As for individual companies, Caesars reported revenue and adjusted earnings slightly ahead of estimates driven by regional and digital, Kelley said. Shares have acted well, helped by low expectations, and were 35% above recent lows. “We think the story increasingly hinges on digital, as this drives positive overall revisions, and if they can hold share, execute in igaming and monetize cross-sell, (there will be) retail and database opportunities.”
MGM reported adjusted earnings of $957 million that were above Wall Street expectations, he said. Shares sold off 10.5% unexpectedly and “we received meaningful inbounds on the move lower,” he said.
The focus on MGM was on regional margins, which underperformed peers, due to staffing and the impact of a negative hold, Kelley said. “Overall, we think MGM’s higher non-gaming mix is the main difference, though management sounds confident in holding its 400- to 600-basis-point margin improvement versus 2019.”
Penn Entertainment reported revenues and adjusted earnings of $1.62 billion and $472 million, versus Bank of America expectations of $1.6 billion and $485 million, Kelley said. “Property margins were up slightly and in line with most regional peers and interactive losses were wider due to the Kansas launch, Ontario, and an $8 million fee.”
Kelley said October was profitable for Interactive and it’s on track for fiscal-year-2023 profitability.
DraftKings reported third-quarter revenues and adjusted earnings ahead of Bank of America’s upside scenario. Kelley said that a sharp drop in stock prices after earnings were reported was due to adjusted-earnings guidance some $100 million lower than consensus and no strategy change or sense of urgency around profitability timing, despite broader tech and e-commerce-sector woes. In addition, an ending cash balance of $500 million for 2023 was $200 million to $250 million below expectations. “We’re looking for more of a sense of cost control, but recognize DraftKings is in a tough strategic spot.”
Kelley highlighted some of the commentary from companies that provided insight about the marketplace.
“We have continued to look at detailed cohort data and are not seeing any discernible indication that the macroeconomic environment is impacting our overall customer engagement,” according to DraftKings.
Caesars cited trends in its regional segment remaining consistent over the last couple of quarters. “As we look to the remainder of ’22, we remain optimistic about our business, as consumer trends remain healthy, especially versus ’19. As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, the return of the international consumer, as well as the potential for the full recovery of our older-demographic consumer who has been the most impacted by COVID-19.”
MGM had reasons to be optimistic as executives look ahead. “That said, we’re not blind to the overall macroeconomic conditions and we remain keenly aware of the impact of inflation and the concerns of a potential recession,” according to MGM executives. “We continue to stay alert and are actively monitoring our business and indications of a slowdown. Our operations teams have become incredibly nimble over the last few years … and are prepared to quickly adjust our business to the changing demand trends if they occur.”
As for Penn, the company said the trends are consistent with what they saw during the third quarter. “Again, I’ll highlight that there is seasonality. Just remember that as you’re looking historically at what gaming revenues and EBITDA and margins look like they’re usually as a bit of a drop off from the first three-quarter average to the fourth quarter. That will likely happen again here in 2022. But the trends have been very, very consistent. … The answer is things look good and things look consistent.”