U.S. gaming, especially in Las Vegas, remains strong heading into 2023, while Macau offers the best chance that Wall Street estimates will be understated, according to an investors note from Bank of America Securities research analyst Shaun Kelley.
In his note Wednesday, Kelley said data remains resilient, citing B of A’s latest room survey and credit-card spending, and called gaming “a big COVID winner with virtually no mean reversion on revenues or margins yet.”
In Las Vegas, Kelley said that to start the year, 2023 revenues will be bolstered by comparisons to early 2022 when the omicron variant of COVID caused a slow start. Las Vegas is also well positioned by a strong event calendar, with the Formula 1 race in November and Super Bowl in February 2024, and a rebound in group and convention business starting this week with CES that will bring 100,000 to the city. Kelley also cited the openings of Fontainebleau Las Vegas and Red Rock Resorts’ Durango Station by the end of the year.
Kelley added, however, that both gaming revenue and average daily room rates are well above pre-COVID levels and as 2023 progresses to mid-year, the year-over-year comparisons will be challenging. “Revenues are estimated to grow about 1% year over year amid tough comps, but there is a strong event calendar including CES, ConAgg, Formula 1, and the Super Bowl,” Kelley said in a recent report.
Las Vegas Strip gaming and revenue per available room have been 24% higher versus pre-COVID, while regional casinos are up 7%, with margins 1,000 basis points higher versus pre-COVID, Kelley said.
As for regional casinos in 2023, their forecast isn’t as bright as Las Vegas. Kelley predicted a 0.5% decline in 2023 compared to 2022, reverting to pre-COVID growth rates. Another concern is inflation on the lower end of the market and potential job losses from an economic downturn. He also cited as a negative new openings in Virginia, Nebraska, and Illinois.
“No alarm bells yet from monthly reports, but visitation data has been lackluster for six-plus months,” Kelley wrote. “The less discussed 2023 risk could be creeping supply pressure.”
In a recent report, Kelley said they see “flattish organic growth and even slightly negative on a same-state basis given new supply.” Margins are at the peak, but they can remain well above pre-COVID levels even in a recession. Cash flow should be strong, he said.
Kelley highlighted online gaming and teased it as the “start of profitability,” but questioned whether it’s enough. He said 2023 calls for solid 25%-plus growth and “a meaningful industry inflection point as we hit breakeven for most of the sector.” Gaming revenue growth continues to surpass expectations, with a shift toward higher online sports betting hold.
Three of the top five sports betting operators could break even for the calendar year and two might be profitable by the fourth quarter, Kelley said. Smaller operators have dialed back ambitions, while Fanatics is a new participant in 2023.
Kelley said the pace is slowing for online legalization and that stocks remain expensive on any traditional measure. The industry can rationalize costs only as quickly as the most dominant players, primary Flutter/FanDuel, will allow.
“The bottom line is profitability catalysts may be fleeting and long-term structural margins matter more,” Kelley said.
Overall, when it comes to gaming stocks in 2023, Kelley said they are “largely neutral with some caution.” He said this is the first time in more than a decade they hadn’t issued a single buy rating on one of the larger-cap names in their group, as they await better risk rewards.
Kelley said they remain focused on Boyd Gaming for valuable and capital return, Churchill Downs for growth, and VICI Properties for stability and dividend yield.
“Domestically, we see attractive valuations, but are concerned estimates may be too high as macro pressures mount,” Kelley said. “Macau is the opposite. Estimates are potentially too low, but we think historical valuations could be too high and may be less applicable.”
Signs point to a major reopening in Macau as China relaxes COVID restrictions and that offers the best opportunity for positive estimate revisions. Risks remain due to low visibility, geopolitics, capex requirements, and new supply, he said.
A full recovery in Macau implies a 35% to 45% upside to their 2023 estimates for Las Vegas Sands and Wynn Resorts, Kelley said. Their 2024 estimates assume a full mass-market recovery and on that basis Sands trades 10% below historical average while Wynn is 30% below historical averages.
“We believe Macau offers the best chance for positive estimate revisions in 2023,” Kelley said. “A full recovery implies an 85% upside to our 2023 Macau estimate. However, we are concerned Macau is increasingly a consensus for investors, with valuations now an average of 15% higher than historical norms.”
Kelley said the bottom line is Macau stocks comprised the “big outperformers” in 2022, and while it’s too early to be negative, non-gaming capital expenditures, low or no dividends, China policies, and geopolitics could cap multiple expansion versus pre-COVID levels.
