Wall Street analyst tackles gaming stocks in 2024

January 4, 2024 9:25 PM
Photo: Shutterstock
  • Buck Wargo, CDC Gaming Reports
January 4, 2024 9:25 PM
  • Buck Wargo, CDC Gaming Reports

According to a Wall Street analyst, Las Vegas Strip and locals casinos are the best positioned in the industry heading into 2024, despite the challenges of higher labor and utility costs and difficult comparisons with a strong 2023.

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“Despite challenging rate and cost comps going into 2024, the Strip and locals’ remain the most attractive market for casino operators, driven by group recovery and the sports and events calendar,” said David Katz of Jefferies Equities Research in a note to investors.

Katz said Caesars Entertainment and MGM Resorts International benefit from Strip fundamentals, while Red Rock Resorts “is positioned to deliver growth” with the opening of its Durango Casino & Resort in December that’s outperforming expectations.

“As we look toward Las Vegas in 2024, we expect revenues for casino operators to remain relatively flat compared to the prior year due to tough comps, but potential catalysts for growth include a strong event calendar. Las Vegas will be hosting Super Bowl LVIII, several CONMEBOL Copa America soccer games, and local sporting events,” Katz said. “However, while revenues stay flat or grow minimally, we expect adjusted EBITDA margins will continue trending downward as a result of increased operating costs.”

In November, Caesars, MGM, and Wynn Resorts reached agreements with Culinary Union Local 226, covering about 35,000 hospitality workers. The ratified five-year agreements will provide union workers with their largest wage increase in history, a 10% lift in year one and an overall lift of 32% over the term of the new agreement.

“Commentary from management teams indicated that labor, utilities, and insurance are all impacting the bottom line and are expected to do so going forward,” Katz said.

Regional casinos outside of Las Vegas are expected to continue posting mixed results in 2024, Katz said. In mature gaming states, gaming revenue has steadily improved since the start of the pandemic, with a full recovery in 2022.

“However, 2023 regional gaming revenues struggled to outperform a tough comparison to the prior fiscal year,” Katz said. “In addition to the tough comparisons relative to 2022, macroeconomic headwinds have also negatively impacted results from the current year. We expect companies operating within regional markets to see minimal top-line growth, with margin deterioration into fiscal year 2024.”

For example, Katz said Boyd Gaming and Bally’s, which generate 52% and 59% (excluding Bally’s temporary casino in Chicago) adjusted EBITDAR from regional properties, are both expected to see about a 200-basis-point reduction in margins by fiscal year 2024. Looking at fiscal year 2025, Katz expects margins in regional segments to stabilize, with growth returning to normal at about 2%.

Growth has been scarce and Churchill Downs is one operator that has it, Katz said.

“Few new markets exist in 2024, except for Kentucky and Virginia to which Churchill Downs has unique exposure and 2024 should progressively demonstrate the pivot from cap expenditures to cash-flow growth,” Katz wrote.

“Meanwhile, PENN’s regional business should prove in line with the group, but the ongoing focus on early positive launch metrics from ESPN Bet should continue to support the shares’ recent momentum.”

As for Macau, Katz said it continues its post-COVID recovery by macro-economic deterioration for mainland China and that remains a headwind for stocks. Macau has seen incremental improvement with gaming revenues in December about 19% lower than 2019 levels.

Jefferies’s forecast for Wynn and Las Vegas Sands in 2024 will achieve 76% and 90% of 2019 levels, respectively. By fiscal year 2025, Las Vegas Sands, Wynn, and MGM should be operating at about 103%, 92%, and 137% of their 2019 EBITDA levels, respectively, Katz said.

“The key factors to further upside are the absence of outlawed junket business and concerns over the economy in China,” Katz said. “Notwithstanding a strong Lunar New Year forthcoming and continued gross gaming revenue improvement, Wynn and Las Vegas Sands should remain capped below long-term valuation averages at 9x to 10x.”

Jefferies gave Caesars Entertainment a buy rating, citing continued deleveraging, improving digital, and a solid Las Vegas that is partially offset by rising costs.

“The shift to profitability in the digital segment, which brings EBITDA of $43 million in 2023 to $338 million by 2025, coupled with Las Vegas stability, should overcome the moderate weakness in regional gaming and rising costs. Overall, we like the set-up for Caesars versus most peers at present,” Katz said.

MGM also has a buy rating from Jefferies. Katz said, “Something’s likely to give on the digital side. Las Vegas is still strong, but costs are a headwind. The digital business underperformed in 2023 and there appears to be a change afoot with joint-venture-partner Entain, which we expect should drive more positive performance in 2024.

“The Las Vegas market remains in acceleration, although the cost side of the equation is a headwind,” Katz said. “Casino operators on the Strip agreed to the highest-ever increase in wages for union workers over five years, which will negatively impact EBITDA margins. However, we believe these matters are currently priced into the shares and the positive prospects for Las Vegas, Macau recovery, digital profits, and other growth opportunities should drive value longer term.”

Wynn is a hold, with uncertainty surrounding China and gross gaming revenue hovering around 70% in the second half of 2023, Katz said. In fiscal 2025, they expect the company to gradually recapture pre-COVID levels of revenue and EBITDA, with Wynn Macau and Wynn Palace Cotai properties operating at 70.4% and 86.3% of 2019. “Additionally, exposure to Las Vegas and regional markets will negatively impact EBITDA margins as costs continue to rise.”

Boyd Gaming is also a hold, as Katz expected pressure from “choppy regional gaming markets and competition in Las Vegas locals.” Margins are compressing as labor wagers and utilities increase. Over the next two years, they predict revenue growth of 85 basis points and adjusted EBITDAR declines of 180 basis points.

“The online segment and the revenues generated from the digital arrangement with FanDuel are expected to offset mixed regional gaming results,” Katz said.

Red Rock Resorts has a buy rating, as the company continues to operate successfully due to the flourishing Las Vegas market and strong portfolio of developable 305 acres and actively marketed 217 acres. “The opening of flagship property Durango in December will drive growth for the company as initial performance has been above expectations.” However, Red Rock, similar to other operators in Las Vegas, is expected to experience margin degradation driven by higher operating expenses.”

Las Vegas Sands is a hold; the uncertainty of China continues to put pressure on LVS. In the second half of 2023, excluding December, gross-gaming-revenue levels have averaged 28% lower than those of 2019. The removal of VIP junkets provides uncertainty surrounding the future of the base and premium mass segments.

“Visitation levels and gross gaming revenue should experience improvement heading into fiscal-year 2024 as we forecast the Lunar New Year and two Golden Week holidays May and October should be catalysts.” Additionally, the $1 billion in capital expenditures to renovate Marina Bay Sands in Singapore should drive an additional $250 million in EBITDA in fiscal year 2024 and 2025.

Golden Entertainment is a hold; the operator continues to search for its next value-enhancing opportunity. Following the sale of its distributed-gaming segment, the company remains focused on improving its operations in Nevada, specifically through renovations at The STRAT and properties within the taverns portfolio. “Given leverage, adjusting for the sale of distributed gaming and Rocky Gap casino is 1.0 to 1.5x, there is plenty of opportunity for growth,” Katz said. “We are inclined to believe that it becomes either a buyer or seller in the relatively near term.”

Penn National is a hold. Initial data points from ESPN Bet should provide PENN with near-term catalysts, while the long-term setup toward profitability remains less clear, Katz wrote. Expectations for promotional spend increased in fourth quarter 2023, which will be slightly offset by lower spend in the second quarter and third quarter in 2024. “Digital aside, the regional business continues to operate modestly, despite a struggling environment,” Katz said.

Bally’s Corp is a hold. The Chicago casino project and the Oakland A’s move to Las Vegas provide the company with several opportunities. The temporary facility in Chicago generated about $8 million in revenue in October and November and is expected to continue ramping over the next year.

“Additionally, Bally’s has an opportunity to redevelop the remaining 26 acres of the Tropicana Las Vegas site post the A’s stadium project to a potential hotel,” Katz said. “Despite the unique gaming opportunities, the company generates all of its positive EBITDA from U.S. regional gaming and global digital gaming, which we consider to be modest growth businesses, partially offset by losses from U.S. digital gaming.”

Churchill Downs is a buy. Katz said it has several growth avenues that should far exceed the industry. The company continues to face rising expenses, including labor costs, which have and will impact properties such as Del Lago in New York, Katz said. However, the company’s capital investment pipeline, including the opening of Terre Haute in Indiana and Dumfries in Virginia in the second quarter of 2024, should offset rising costs and allow the regional gaming and historical racing segment to grow an expected two to three times by 2025.

In the digital realm looking ahead into fiscal-year 2024, Katz is starting to see the performance differential of the digital business of casino operators widen. After several years of heavy investment, Caesars had its first quarter of positive EBITDA in second-quarter 2023 and is expecting to generate $178.3 million and $338.2 million in fiscal 2024 and 2025, respectively.

“Additionally, despite headwinds from the joint venture with Entain, BetMGM was profitable in the third quarter of 2023 for the first time and should post its first full year of positive EBITDA in 2025,” Katz said. “On the other hand, we are anticipating further losses for both Penn and Bally’s, which will drag on each company’s overall profitability.”

After a $4.5 billion investment in its Interactive segment so far and its new partnership with ESPN, Penn will generate negative profits. It is important to note that PENN is interested in pursuing a gaming license in New York which would increase its already large investment, he added.