With the caveat in mind that the overall market could tank and take gamers along with it , I think we can say casino stocks have hit bottom and it should be up from here .
FANTINI ’ S FINANCE
Bad News , Good News
Declining gaming earnings and subsequent stock declines were expected , but the result is good bargains
BY FRANK FANTINI
First-quarter earnings have now been reported by casino operators , leaving us with one statement : Finally . And one question : But when ? The finally part is that earnings finally weakened after it was clear for months that business conditions had declined , especially for regional operators .
The blame has been placed on a variety of things , including harsh winter weather , and there is some truth to that . But the reality is that business had been slowing down , a fact somewhat masked in Las Vegas by an events calendar that included mega happenings like Formula 1 and the Super Bowl .
Another factor depressing earnings is the cost of labor . Its rise in Las Vegas had been well publicized as Culinary Union contracts were negotiated , but labor costs also rose in regional markets .
And , while casino executives have talked about business volumes normalizing since the first quarter , the latest gaming revenue reports from various states show the declines continuing , and accelerating in some cases .
Readers of this space would not be surprised by the weakness in business , as we ’ ve repeatedly warned about it and it was just a matter of time before it showed up on P & Ls . So much for the bearish part of this column . The bullish part is in the question : But when ? The reality is that casino stocks have been falling behind the overall market for some time , and it is just a question of when investors will notice bargains , including among the best companies in the industry , like Wynn Resorts .
The decline in stock prices might not be over . There ’ s no telling what impact a recession would have , and gaming stocks certainly can fall further if the overall market sinks after its big runup over the past year .
However , at some point value will be recognized . And that might be happening now . A number of casino stocks held their own or even modestly advanced after first-quarter earnings dips , which may suggest the worst is in , at least relative to the overall market .
In fact , with the caveat in mind that the overall market could tank and take gamers along with it , I think we can say casino stocks have hit bottom and it should be up from here . Here are some of the first-quarter winners : The big boys : Wynn and MGM Resorts . While others were making their excuses , these two companies beat expectations . In part , that was thanks to the resurgence of Macau , where both gained market share . To a great extent , it is thanks to the uniqueness of the Las Vegas Strip , a one-of-a-kind market in the world .
With the caveat in mind that the overall market could tank and take gamers along with it , I think we can say casino stocks have hit bottom and it should be up from here .
Both companies should benefit by their growth prospects and by having affluent customer bases at a time when lower-end customers are cutting back . And at valuations below eight times EBITDAR for MGM and below 10 times for WYNN on even bullish analyst price targets , the stocks should prove very rewarding .
The home boys : Red Rock Resorts and Churchill Downs once again demonstrated that profitability and growth can come from drawing players close to home . Such results also come from excellent execution of strategically sound growth plans . For Red Rock , that ’ s operating best-in-class Las Vegas locals properties . For Churchill it is capitalizing on ( and in fact , leading ) the proliferation of historical horse racing machines , as well as fully exploiting its unique Kentucky Derby franchise .
Neither stock is cheap compared to peers at over 10 times analyst EBITDA forecasts and target prices , but those valuations are cheap compared to their growth rates , and compared to longer-term growth prospects not yet in analyst forecasts .
The value plays : Golden Entertainment and Penn Entertainment .
The stocks of both of these companies are way below their highs , and both gave plenty of reasons to disappoint investors based on their first-quarter performances and , in PENN ’ s case , its own financial guidance for the coming year .
To a great extent , both companies have done it to themselves . Golden said to heck with diversification and sold off its route businesses and Maryland casino to become a pure southern Nevada casino and bar operator . PENN , after a losing sports betting experience with Barstool , jumped back into the fire by making an expensive commitment to its new ESPN BET operation .
What ’ s lost among investors is an appreciation for the soundness of their basic casino businesses , especially given valuations of under five times EBITDA for PENN and around 5.5 times for GDEN .
PENN will eventually either make ESPN BET work and the stock will soar , or it will go on and be valued for its sound regional casinos . Either way , the stock should be well above today ’ s level , though that is expecting an investor to have both patience and confidence in management .
Golden is a now cash-flush , solid operator in a growing market that should be selling at least a third higher just to match peers . And its peers are undervalued .
That gets us back to one of the themes of this column . Many casino stocks are too cheap , and the time may be at hand when investors act upon that fact .
Frank Fantini is principal at Fantini Advisors , investors and consultants with a focus on gaming .
12 Global Gaming Business JUNE 2024