Gaming stocks underperform, get downgraded

April 19, 2022 10:53 PM
  • David McKee, CDC Gaming Reports
April 19, 2022 10:53 PM
  • David McKee, CDC Gaming Reports

Whether continuing fears over omicron or the war in Ukraine, a variety of external factors conspired to suppress gaming stocks, according to a new Truist Securities analysis by Barry Jonas.

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“While we expect mostly solid results, [management] teams may need to hedge what we believe to be a strong April so far … with macro uncertainty,” he wrote, alluding to narrowing gaming-revenue improvements as the industry moves deeper into 2022.

Indeed, gambling revenue is running 8% ahead of 2019 with 60% of U.S. jurisdictions publishing first-quarter results, although double-digit growth in January and February slowed going into March (not yet fully reported, with Nevada still a holdout). “Early results for April are tracking in line with March,” Jonas added.

While the “volatile macro environment” was on everyone’s minds, Jonas reported, it wasn’t visible in the gaming data. Looking ahead to first-quarter company reports, he wrote, “We expect to hear commentary during earnings in line with what we’ve heard in prior months, in that rising gas prices and inflation have not had a significant negative impact on gaming revenues to date. That said, the longer these trends continue, the more likely the industry could see some negative impact.”

Unemployment was described as returning to pre-pandemic levels and consumer confidence and the personal savings rate “back to normal.” However, taking note of 8.5% Consumer Price Index inflation and gasoline prices 48 percent higher than in March 2021, Jonas said that these “remain elevated, which could cause concerns to gaming if sustained.” The impact of higher fuel costs “appears somewhat muted across our universe.”

Drawing a comparison to the Great Recession, “Gaming companies have meaningfully delevered and/or shifted traditional leverage to rent. Only a few of our companies have significant exposure to rising rates in the immediate future, including Caesar’s $6.5B variable rate debt,” Jonas chronicled. And he expected even Caesars Entertainment to deleverage thanks to free cash flow and impending asset sales. As for other debt maturities, he noted that they’re “minimal,” not coming due until the year after next.

Las Vegas room rates have shot up this year, with Truist Securities’ survey showing 82 percent growth in January, followed by an 87 percent gain in February and 77 percent in March. Going forward, rates are trending 74 percent higher this month, followed by 66 percent in June and 82 percent in July. “With conventions slowly coming back though expected to make a full return in 2023, we expect to see midweek rates strengthen as we move into the back half of 2022.”

As for the persistence of COVID, Jonas reported that although “cases are picking up again (we note Philadelphia recently reinstituted its indoor mask mandate), we believe hospitalizations will remain mild … but we see less willingness by state governments to shut down their economies again.”

One of Jonas’ star performers is Caesars, whose trends he sees improving month over month. The company’s much-anticipated sale of a Las Vegas Strip resort is now viewed as a July or August event. Increasing terrestrial-casino revenues will likely be offset by higher losses in the digital sphere, estimated by Jonas at $845 million. (Caesars recently pulled back on marketing of its sports-betting operation.) Those lower interactive valuations caused Jonas to shave $5 off his $110 price target.

The analyst’s confidence in Penn National Gaming was bolstered by the conservatism of the company’s earnings guidance, initially dampened by COVID and weather-related issues. He had strong hopes for the April 4 launch of TheScore in Ontario, which he thinks could be Penn’s number-one digital jurisdiction. Still, he trimmed his price target from $65 to $60.

“Bullish” was the word for Jonas’ attitude toward Boyd Gaming, whose “consistent operating performance” was credited with substantial generation of free cash flow, along with deleveraging and dividends. Jonas described the Las Vegas locals market, Boyd’s linchpin, as “stronger than ever,” even though Wall Street continues to value Boyd as though it were an operating company without real estate assets. He kept his price target at $90 a share.

Boyd’s only serious rival, Station Casinos (a.k.a. Red Rock Resorts) “continues to benefit from a healthy Las Vegas locals market with sustained lower promotional levels.” Jonas justified his higher-than-the-Street estimates by noting Station’s “continued strength into next year,” although he foresees supply-chain issues forcing a cost increase and construction delay at in-progress Durango Station. He maintained a $66 price target.

While Jonas showed confidence in Bally’s Corp., he conceded that “shares have continued to struggle this year” and substantially cut his price target, from $53 to $38. He rationalized this by remarking that it matched Standard General’s takeover bid, a 27% premium to the current stock price. “Given the turbulence across land-based and interactive gaming in the U.S. and UK, we think taking the company private could make sense here,” he wrote. “But based on today’s share price, the market is clearly assuming the offer won’t proceed.”

Jonas was even more cautious on MGM Resorts International, which he rated “Hold,” despite the fact that recent meetings with MGM brass “reinforced our belief on a pending full Vegas recovery.” But he was concerned by the continued struggles of the Macau market, which is coming off a very low-revenue first quarter, and “the market continues to discount any interactive upside” despite strong market-share inroads by BetMGM. He said the latter “is a strong interactive player with omnichannel advantages, but would prefer MGM to own 100%.” Jonas’ price target inched down to $48 a share from $51.

Jonas kept a relatively low ($22) price target on DraftKings, although the company recently increased estimates for its total addressable market and cash flow for the long term and continued to perform strongly in the near term. “However, with heightened promotional activity around the Super Bowl, as well as the launch of New York OSB, we believe overall sentiment remains negative with a focus on [near-term] losses with uncertainty around the path to profitability.” Jonas kept a “hold” on the stock.

Across the manufacturing sector, Jonas posted “Buy” ratings on seven discrete stocks, maintaining his previous price targets on all of them.