It couldn’t be going better for the U.S. casino industry, especially gaming revenue in Las Vegas. Still, a move Wednesday by the Federal Reserve to raise interest rates by 0.75% and another potential increase in July create concern of a potential recession, and operators are already preparing for it.
The stock market continues to tumble and rising interest rates mean mortgages, credit cards, and vehicles cost more. None of that takes into account rampant inflation with higher gas and food prices subtracting money from people’s wallets that they could be spending on entertainment. The Great Recession that started in 2008 hurt Las Vegas casinos for years.
In a note to investors this week, David Katz, an equity analyst for Jefferies Research Services, discussed his team’s meeting with casino executives in Las Vegas on Monday and Tuesday. He cited “evidence of the dichotomy” between current operating strength and markets’ expectation of a recession.
“Las Vegas trends and outlooks are strong … for now,” Katz wrote. “All visual indications and commentary from our meetings with MGM Resorts International, Caesars Entertainment, Boyd Gaming, Golden Entertainment, and Red Rock Resorts are that business levels remain very strong in the second and third quarters, with demand, pricing, and volume levels above 2019 levels. The 2023 bookings for the Strip imply continued strong demand and pricing, aided by accelerating group and event business, with the expected addition of international travel.”
Last week, the U.S. government dropped the COVID-19 testing requirement for international visitors.
While there was no specific evidence of a slowdown, teams vary in strategic approach, should one occur, Katz said. He didn’t detail those plans, but they’re mostly about cost cutting.
“All meetings addressed the possibility of a recession and the potential scenarios of revisiting costs in the event of a demand slowdown,” Katz said. “We believe the appropriate approach is focused on names with greatest control over their outcomes, rather than reliance on exogenous forces and events.”
Katz noted that Las Vegas local casino operators Boyd, Golden, Red Rock indicated that wage growth outpacing inflation is driving a positive context for them.
Operators agree, however, that the second quarter that ends June 30 is a “challenging comparison in both top line and margin,” Katz added.
“This is particularly true in regional and Las Vegas locals markets,” Katz said. “Budgets for equipment/tech remain solid at a minimum and in catch-up mode at a maximum.”
Katz wrote that even in an uncertain context, it’s still possible to pick stocks.
“Absent visibility into the timing, scale, and scope of a prospective recession, we believe the best stock performance should come from companies with the greatest control over their outcomes, rather than relying on demand acceleration or the capital markets,” Katz said.
Katz named MGM and Golden Entertainment on the casino side and Light & Wonder and Everi on the vendor side being in the best positions.
MGM continues to drive operating and loyalty-program improvements with control of its more than $5 billion cash balance for the pending sales of Gold Strike Tunica and the Mirage in Las Vegas, Katz said. He cited Golden, which operates the Strat and other locals’ properties, as having minimal capital needs and potential non-core assets to sell.
Katz told investors that MGM executives are buoyed by forward hotel bookings on the Strip, with weekend rates 20% higher than pre-pandemic. Conventions are still on track to meet 90% of 2019 levels by the fall and fully recover by 2023, he said.
MGM Rewards enhancements continue to accelerate and are expected to be key drivers of revenue in 2023 and onward, Katz said. The company is “potentially interested” in regional mergers and acquisitions, depending on market, size, and valuation. The company will remain an active repurchaser, he said.
Red Rock Resorts is positioned with its $750 million Durango Station in southwest Las Vegas under construction, with 70% of the costs fixed, Katz said.
Red Rock executives pointed out that while home sales are slowing, they’re “still confident in Las Vegas locals, given the inflow of higher net-worth demographics.” There’s only “slight weakness” at the lowest end of the customer base, he said.
Boyd Gaming said they’re comfortable with their competitive positioning in Las Vegas, despite “forthcoming competition in the area of some properties,” Katz said.
Wynn Resorts’ balance sheet should continue to improve, as earnings grow in conjunction with a Wynn Boston Harbor real-estate sale in the third quarter, Katz said. Wynn Interactive is pivoting to an igaming focus, with spending under control.
“(They) are not seeing signs of weakness in Las Vegas,” Katz said of Wynn. “Group and convention business is accelerating.”
Gaming-equipment suppliers continue to benefit from improving products amid current strong demand, Katz said.
“Our meetings with the management teams of Light & Wonder, Everi, and PlayAGS all support improving product offerings within the traditional slot market, as well as in other digital and technology offerings,” Katz said. “In the case of Light & Wonder, transformative product leadership, refined operating strategies, and financial stewardship suggest continued growth in both land-based and digital gaming. Similarly, indications are that Everi’s product momentum and growth are poised to continue in land-based and FinTech. Finally, there appears to be notable product progress forthcoming for PlayAGS near term from repositioned land-based hardware and software.”