Casino stocks are trading at heavily discounted valuations and gross gaming revenue (GGR) is proving surprisingly sturdy against a challenging macroeconomic backdrop.
That’s the sentiment of Roth Capital analyst Edward Engel, who in a note to clients today, points out that while investors are looking for signs of sluggish GGR due to weakness in other parts of the consumer discretionary space, April GGR paints a different picture.
Yet April GGR showed continued strength with regional GGR growing 2.8% year-over-year against more difficult comps. While we expect May/June to decline year-over-year against comps that benefited from stimulus and pent-up demand (May/June ’21 grew +11% vs 2019), 2Q22 can still come within 5% of 2Q21 as long as May/June ’22 decline less than 9% year-over-year,” said the analyst.
Given the tough comparisons the industry is facing in the second half of 2022, any GGR growth could spark confidence among investors that casino stocks are in fact proving sturdier than other consumer cyclical fare. Gaming equities are entering a historically weak period, but if May GGR figures surprise to the upside, typically ominous June performances could be avoided.
Data indicate that revenue declined in Southeastern markets, the overall April GGR picture for regional casino operators was strong.
“Regional casino GGR was +3% YoY, with the month benefiting from one more weekend day than last year. GGR grew in 17 of 27 markets, where declines were concentrated in southeastern states (FL, LA, MS) that eased restrictions early last year. Looking into May/June, we believe avg. daily revs can reach Jan/Feb’s avg. rate, implying May/June GGR -7% YoY and 2Q22 -3.5%,” adds Engel.
April strength is a positive sign because some industry executives say it could be just a matter of time before high gas prices — a scenario showing no signs of abating over the near-term — crimp regional operators. That thesis is rooted in the notion that the bread-and-butter clientele for those venues are folks making daytrips to the properties via car.
Data also confirm that spend per visitor increased in April across a variety of regional casino markets, including Iowa, Laughlin, Nevada, Louisiana and Missouri.
Buyback Binge, Casino Stocks Are Cheap
Casino stocks could find some support from operators that are eagerly repurchasing their own shares ––something that’s occurring as many of these names are well off prior highs.
“In the past nine months, gaming companies have authorized ~$6bn in buy-backs, with remaining authorizations at ~10% of market caps,” notes Engel. “While we acknowledge concerns towards demand in a recessionary environment, insider buying and spend/ trip trends give us more confidence in sticky demand.”
That could be a sign executives see value in their companies’ stocks. Speaking of value, some casino stocks are offering that.
“Land-based Gaming valuations are trading at trough valuations despite record earnings,” concludes Engel. “EV/EBITDA multiples have returned to 2H18/1H19 levels, but underlying valuations are actually cheaper alongside higher FCF conversion rates.”
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