Gaming companies will report third-quarter results over the next two weeks and one Wall Street analyst predicted that while earnings continue to be strong year over year, Las Vegas will “slow dramatically” compared to the second quarter.
Shaun Kelly, a research analyst with Bank of America Securities, said BofA’s third-quarter estimates are running ahead of consensus; however, the comparisons “get tougher in Las Vegas following big year-over-year growth rates” in the second quarter.
“Year-over-year growth in the third quarter is dramatically slower than the second quarter, but we expect positive exit-rate commentary, given the returns of conventions, groups, and events,” Kelly said.
Along the Las Vegas Strip, Kelly expects revenues to increase 7% year over year and adjusted earnings to be up 4% year over year. That compares to the 50% increase during the second quarter.
“Management comments should be upbeat, given the return of group and convention, our room-rate survey showing very strong rates for October/November, and strong late-September spending.”
Strip credit- and debit-card spending, however, did slow modestly to 26% versus 2019 in the third quarter from 31% in the second quarter, Kelly said.
John Decree, an analyst with CBRE Equity Analyst, said he expected gaming executives at the Global Gaming Expo to send a “message of conservatism” about the third-quarter earnings.
“However, the message was nearly the complete opposite of that,” Decree said. “Other than some typical seasonality and maybe some reduced spend and visitation in the lowest customer-demographic tiers, demand remains strong and forward-looking indicators remain unchanged, especially for the Las Vegas Strip, where there is greater booking visibility. The Las Vegas Strip convention and event calendar, a significant focus of ours, remains as compelling as ever over the next two years. Marquee events like Formula 1 are shaping up to be a far greater opportunity for the Las Vegas Strip than previously contemplated.”
In the Las Vegas locals and downtown segment, Kelly said gaming revenue remained stable, with the third quarter run-rate falling 1% year over year, but up 20% versus 2019. In the second quarter, it fell 3% year over year, but was up 24% over 2019.
Kelly said they estimated adjusted earnings to be down 2% year over year, with slightly lower margins. Locals’ card spending was 25% higher versus 2019 and in line with the second-quarter’s growth rate, which he said could support “healthy non-gaming spend.”
When it comes to regional casinos, Kelly said the top-line trends are stable and expects “margins to largely hold serve.” The key will be any change in consumer behavior or softness beyond what was heard in the second quarter.
Gaming revenue is tracking flat quarter over quarter and up 1% year over year, Kelly said. It’s up 12% from the third quarter of 2019. During the second quarter, year-over-year earnings were flat and up 15% versus 2019. Adjusted earnings are projected to be down 1.4% year over year on slightly lower margins.
In the digital segment, growth of the handle in same-state online sports betting has “slowed materially” by tracking 18% year over year in the third quarter, Kelly said. High hold, however, will be a tailwind and could drive “headline beats” during the third quarter.
The hold was 240 to 350 basis points above normal and should help the results. Entain noted strong third-quarter revenues for BetMGM of just over $400 million, Kelly said.
Monarch Casino & Resort kicks off third-quarter earnings on Wednesday and Barry Jonas, an analyst with Truist Securities, said regional operators have highlighted strong trends, despite some concerns about customers in a high inflationary environment.
Operators noted that last year was aided by a stimulus bubble that has since passed, but third-quarter results could be near or ahead of a year ago, Jonas said. A few operators noted some giveback in unrated play, offset by strength in the mid- and high ends. There continued to be a lag from the core 55+ segment, which could be a tailwind in 2023, he said.
Jonas and his team met with a number of operators at G2E, including Caesars Entertainment, Bally’s Corp., Penn Entertainment, MCRI, Golden Entertainment, Century Casinos, and Rush Street Interactive.
“Momentum hasn’t slowed, despite an uncertain macro environment, with continuing tailwinds in both the Strip and regionals,” Jonas said. “While valuations continue to factor a more bearish outlook, gaming operators are keeping their heads down, focused on steady and efficient operations with any return to the pre-COVID playbook highly unlikely.”
With what he calls “a near-certain recession looming,” Jonas said operators haven’t seen a major change in customer behavior, either on the Strip or at the regionals. The only slowdown is concentrated at the lower end of the customer database, though in part due to less marketing attention to that segment.
“Overall, operators continue to preach gaming’s resistance to recessions, pointing to variable cost/pricing structures to mitigate any drop in revenues,” Jonas said.
Jonas expects a strong report from Monarch today, with third-quarter adjusted earnings of $43 million, 3% ahead of Wall Street projections.
Decree noted a disconnect between valuation and fundamental performance in the gaming industry and it’s never been wider. All components of the gaming business and supply chain continue to see record levels of demand and significantly improved operating leverage relative to 2019, he said.
“The balance sheets of global and domestic gaming companies sans Macau are in significantly better shape than heading into the prior recession, yet the macroeconomic concerns continue to keep investors on the sidelines, resulting in trading multiples that are below historical averages,” Decree said.
