As investors await second-quarter earnings reports for major gaming/casino companies, Wells Fargo analysts warn of a slowdown in the industry.
They see “signs that U.S. gaming spending has begun to soften, as consumers grapple with rising inflation, higher interest rates, and increasing economic uncertainty,” they wrote in a commentary.
“We do not expect management teams will have much material evidence to flag just yet, as overall second-quarter trends were generally stable, and early reads on July regional performance will likely reflect a favorable calendar (July 4 was a Monday),” the analysts said.
“However, given broadly increasing macro uncertainty, we expect a more cautious management tone on growth outlooks versus three months ago.”
Las Vegas Strip Benefits
“We think Caesars Entertainment (CZR), MGM Resorts (MGM) and Wynn Resorts (WYNN) could see upside from the Las Vegas Strip,” they said.
That reflects “strong gaming and leisure/transient trends, group/convention business pushed from the first quarter and recovering international visitation,” the analysts said.
“Regionals/Las Vegas locals trends mostly held up, with a strong April and some deceleration in May/June.”
They expect Las Vegas Sands (LVS), Wynn and MGM to post losses before interest, taxes, depreciation and amortization on their Macau operations. That’s because “visitation remained weak in the second quarter and has further deteriorated in July, with recently announced casino closures.” the analysts said.
“Regional gross gaming revenue has started to decelerate,” they said. “While broad gaming fundamentals remained mostly intact during the second quarter, growth versus 2019 [prior to the pandemic] decelerated from April to May and May to June."
The analysts cut their price targets as follows:
· Boyd Gaming (BYD) to $76 from $85. It recently traded at $53.23.
· Caesars to $65 from $106. It recently traded at $39.14.
· Penn National Gaming (PENN) to $38 from $48. It recently traded at 32.23.
· Red Rock Resorts (RRR) to $48 from $56. It recently traded at $34.58.
· Churchill Downs (CHDN) to $255 from $270. It recently traded at $207.10.
· MGM to $49 from $57. It recently traded at $29.76.
Stock Picks
The analysts’ top picks are Boyd and Caesars. “For Boyd, we see a gaming company differentiating itself via its ongoing commitment to return capital to shareholders,” the analysts said.
That amounts to $100 million per quarter of share repurchases, or 7% of its market-cap on annual basis). They also expect Boyd to keep a “highly conservative” balance sheet, with 2.5 to 3 times net leverage.
“For Caesars, we see:
1. “A beaten down valuation (18% yield on 2023 estimated free cash flow per share),
2. “Company-specific growth drivers in 2023 (Atlantic City; Pompano Beach, Fla.; Lake Charles, La.), and,
3. “A deleveraging catalyst via a Las Vegas Strip asset sale, which could reduce leverage by 0.5 times.”
