The impact from omicron may finally be catching up to Las Vegas.
The latest note to investors from Jefferies Equity Research said that what happened during last week’s annual Consumer Electronics Show may be the tip of the iceberg of what’s to come in Las Vegas.
Las Vegas’ biggest trade show was shortened by one day due to the worsening of the pandemic. In addition, CES attracted only 40,000 in-person attendees, down significantly from the 170,000 in 2019. This year’s attendance was expected to be much higher, but omicron sent cases skyrocketing.
In December, Jefferies analyst David Katz said their geolocation data showed strong casino foot traffic on the Strip despite flight and hotel cancellations. “Given the continued surge in omicron cases, we expect a more meaningful impact in January, especially on convention and group businesses,” Katz said.
Expect to hear more from gaming companies in Las Vegas as earnings reports come up by the end of January and early February.
Tourism had returned to pre-pandemic levels even with international travel just starting up again in November after the U.S. lifted a travel ban. Conventions have been the missing piece in terms of pushing visitor rates even higher. December visitor numbers won’t be available for two weeks, but numbers trended down in November and were about 400,000 fewer than November 2019.
Despite that pessimism for Las Vegas in the short term, there’s still a lot of optimism for its continued recovery longer term for 2022.
Bank of America Global Research noted Las Vegas revenues are expected to grow 24%, driven by strong consumer spending, more air capacity, and returning international travelers, conventions, and events.
By comparison, Bank of America says regional casinos are “expected to grow only mid-single digits with modestly declining margins.” Comps will be tougher at regional properties.
A big concern raised by the report is inflation, led by higher labor costs on the Las Vegas Strip, where it’s about 30% of revenue. At regional properties, labor is about 15% of revenue.
“Inflation (mostly wages) is a critical headwind that is new to many operators,” the Bank of America note said. “Las Vegas is the most exposed, but also has solid pricing power.”
Bank of America also looked at some of the factors that can push stocks of Las Vegas companies up and down in 2022.
Boyd Gaming could benefit from continued margin improvement, balance sheets that deleverage more quickly than anticipated, a deleveraging acquisition or transaction, and sports betting upside. The risks to the downside are continued COVID-19 impacts and broader economic slowdown. Slower than anticipated deleveraging and execution on integration from recent transactions are also downside risks, the note said.
Caesars Entertainment risks to the upside “revolve around management’s ability to significantly exceed its forecast, which could come from marketing reductions, compression in Las Vegas, improvement in underlying revenue from regional properties and Las Vegas, sports betting, asset sales and land leases, and a faster than expected recovery from casino closures. Risks to the upside stem from “high financial and operating leverage” used to fund the Caesars acquisition of Eldorado Resorts in 2020.
“Additional risk from the question of whether (Eldorado Resorts’) regional-centric cost-reduction model can work in a market as competitive as Las Vegas,” the note said. “Prolonged industry headwinds related to COVID-19 could further these factors.”
For Las Vegas Sands, which is selling the Venetian, Palazzo, and its convention center, the concerns continue to be a delayed recovery in Macau, COVID-related disruption, increased uncertainty surrounding the implications of the concession process in Macau, pace of reopening in Singapore, and a worse ramp than expected to new properties.
Risks to the Sands’ upside include a faster than expected return to the pre-COVID Macau environment, potential border reopenings, better than expected returns on recent projects, mass-market growth in Macau, and potential entry into sports betting and igaming.
MGM Resorts International is cited for its sports betting and igaming potential. The upside is a stronger than anticipated recovery in Las Vegas and sports betting and igaming ownership changes. Downside risks also involve sports betting and igaming, increased Strip promotional competition, and a slower than expected recovery in Macau and the U.S.
Red Rock Resorts faces labor inflation, a bigger issue for Las Vegas where it has its properties, the note said.
Incremental cash flow will be targeted to Red Rock’s planned Durango Station project in the southwest Las Vegas valley. Risks to the upside are its record margins; there’s less of a drag with the sale of the Palms and properties that remain closed. Red Rock owns 100% of its real estate that provides security and flexibility for borrowing, the note said.
For Wynn Resorts, pre-COVID Macau was 70% of Wynn’s adjusted earnings and that faces challenges with COVID, structural challenges for Macau, and rising geopolitical risks.
“We continue to believe that Wynn’s expansion into online sports betting via its Wynn Interactive business has the opportunity to provide key catalysts, such as a potential reacceleration in Macau and upside from Wynn’s domestic properties in addition to online optionality,” the note said.
