Regional Casino Stocks Could Prove Sturdy

Gaming equities of all stripes are performing well to start 2023, but regional casino stocks could be among the sturdier names as this year unfolds.

Regional Casino
Regional Casino
Slots players at a Penn Entertainment casino in Ohio. An analyst is positive on regional casino stocks. (Image: The Business Journals)

As 2022 drew to a close, there were fears in the investment community that regional casinos would be pinched by the toxic combination of high inflation, rising interest rates and consumers dialing back discretionary spending to combat macroeconomic headwinds. Data indicate regional casinos are proving more resilient than expected.

While there has been a slight deceleration from the consumer, there’s nothing that’s meaningful to financials or, at this point, to valuations, in our view,” wrote Macquarie analyst Chad Beynon in a note to clients. “As we wrap up numbers for ’22, this implies 4Q22 gross gaming revenue (GGR) +1% year-over-year, or +10% vs 4Q19, and we caution slight YoY weakness in the South (tough comps) and some markets in the Midwest (weather). Drilling down further, spend/visit is still driving gaming revenue higher, up >30% (vs ’19) in the recent months.”

For 2023, Beynon is forecasting a 2% drop in GGR for regional casinos with the current quarter being the strongest in terms of revenue upside for gaming venues outside of destination markets.

Mixed Q4 Earnings Bag for Regional Casino Stocks

To this point in earnings season, investors’ reaction to reports courtesy of regional operators has been mixed. For example, Penn Entertainment’s (NASDAQ: PENN) fourth-quarter results were solid, but the stock sold-off yesterday. Conversely, Boyd Gaming (NYSE:BYD) is soaring today on the back of an impressive earnings beat.

Potentially auguring well for regional casino stocks are two points: Geographic diversification and historical precedent. Even if a recession arrives and morphs into an economic collapse comparable to the global financial crisis — an unlikely proposition — regional operators could prove steady relative to the broader consumer discretionary sector.

“As evidenced during the global financial crisis, when Regional Gaming revenues fell mid-single digits compared to other discretionary sectors down closer to 20%, Regional Gaming has remained resilient during the last few years. As it relates to ’23 guidance, a different task for any company in ’23, we expect companies to issue ~flat revenue guidance (confirmed by PENN), particularly if weakness isn’t seen in January,” added Beynon.

Others on Wall Street believe that regional casinos could be durable in the early stages of a recession and may not be vulnerable until a material increase in unemployment data arrives. However, the January jobs report delivered today was better-than-expected and the unemployment rate is at a multi-decade low.

Forecasting Regional Casino Earnings Surprises

Beynon forecasts that biggest earning beats among regional casino operators will arrive courtesy of Bally’s (NYSE:BALY), MGM Resorts International (NYSE:MGM) and Monarch Casino & Resort (NASDAQ:MCRI).

Although MGM is the largest operator on the Las Vegas Strip, it also boasts an extensive regional portfolio, particularly in the Mid-Atlantic and Northeast regions.

As for regional casino companies that could be in-line with or slightly miss earnings estimates, Beynon forecasts that group could include Caesars Entertainment (NASDAQ:CZR),  Century Casinos (NASDAQ: CNTY), Full House Resorts (NASDAQ:FLL) and Wynn Resorts’ (NASDAQ:WYNN) Encore Boston Harbor.

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