OK, so the stock market is not for the faint of heart. Rarely is it for the impatient either. That’s especially the case these days, including in the gaming industry.
Casino investors have little choice right now but to take the long view. Reopenings are in full swing and consumers are responding with gusto and apparently little fear. Assuming in a post-lockdown world that the worst is already priced into the stocks, investors are looking for a sustained recovery in the larger economy to float everyone’s boat.
“People came back (to casinos), and that’s an encouraging first step,” Stifel Nicolaus gaming analyst Brad Boyer told GGB News. “But what do things look like once we get deeper into this, when the stimulus money goes away, when we have more competition coming online? Does this pent-up demand burn off?”
In other words, investors: Buckle up. It’s going to be a bumpy ride.
Bouncing Around
This was apparent with the resumption of business in Las Vegas on June 4, the catalyst for double-digit percentage leaps in price for the likes MGM Resorts International (NYSE: MGM), Wynn Resorts (Nasdaq: WYNN), Penn National Gaming (Nasdaq: PENN) and Las Vegas Sands (NYSE: LVS). Then, last week, everyone followed the larger markets down. All three leading U.S. indices closed Thursday with their steepest single-day losses since the economy went into forced hibernation in March.
The grim realities of the pandemic had hit home anew. The country was reopening with enthusiasm, but cases of Covid-19 were rising in half of U.S. states, exactly as medical experts had warned, with hospitalizations and deaths on the sharpest increase in states that reopened the soonest and with the fewest precautions. This was accompanied by a sobering message from Fed Chairman Jerome Powell that jobs numbers won’t be returning to pre-pandemic levels any time soon and that the road to recovery will be “long.”
Beginning June 9 and for the next five days, every major gaming name— operators and suppliers both—tumbled. Innovation Capital’s index of large caps was down 8.3 percent, regionals by 10.9 percent—this after rebounds of 89 percent and 178 percent from the lows plumbed back in March.
”They bounced back very nicely,” said Innovation’s Managing Director Matt Sodl, speaking of prices the last two months. “But I think they got caught up in the exuberance of the overall market, with nothing at this point to reference to fundamentals. (It was) just the exuberance of reopening, the comfort of knowing they were not going to be sinking into the abyss.
“We’re actually seeing encouraging results from a lot of pent-up demand, and not just in regional markets, but the destinations as well,” Sodl said. “But I think things got ahead of themselves a little bit.”
Rally, Correct, Repeat
Markets rallied Monday on news that the Fed was committed to more bond purchases to keep the credit tap flowing for big business. With that, just about every gaming name climbed back from the anxiety of the previous week with gains ranging from just under 1 percent to better than 6 percent.
But Sodl believes a correction is still in order from the highs of May and early June—to him, 10 percent sounds about right.
Price movements up to now largely have favored names in those jurisdictions that opened the soonest with the most: PENN, Boyd Gaming (NYSE: BYD) and Eldorado Resorts (Nasdaq: ERI), among others.
As Bloomberg Intelligence analysts Brian Egger and Kristi Martiko noted, writing at the end of May, “The two gaming companies under BI coverage that experienced the largest stock-price gains since May 8 Penn (up 61 percent) and Eldorado have among the highest percentages of casinos that re-entered service, or announced reopening dates, in mid-May.”
They added, “Penn and Boyd, with the greatest percentage of reopened regional properties, also had among the highest expansions in EBITDA multiples.”
This would accord with the widely held expectation that the regional markets will recover sooner than Las Vegas.
As Boyer put it, “I like that hyper-local model that’s over-indexed to gambling revenue. It’s a customer base with a higher propensity to gamble in areas where there’s not as much competition for the entertainment dollar. It’s slot-driven, and it’s not dependent on hotels, air travel and conventions.
“That sector will be resilient, no matter what happens from a macro perspective.”
A recent report from Fitch Ratings analysts Alex Bumazhny and Colin Mansfield underscored this view. “The air capacity issue (for flights coming into Las Vegas) is the x-factor. People may want to come, but do they want to get on a flight with all the uncertainty?”
They forecast a 50 percent revenue decline in Las Vegas this year, 20 percent in the regional sector, both tracking a “U-shaped” recovery that won’t see revenues returning to pre-pandemic levels for another three years.
Awaiting Data
In the meantime, with more than half the country’s 1,000 or so commercial and tribal casinos back in business and openings increasing every day, the investment story is rapidly shifting to July, the first full month of results since February, and what happens after that.
“Investors are looking at 2021 and beyond,” said Boyer. “In that respect, fundamentally, I don’t think anything has changed per se. I don’t think we have enough data to start thinking about changing ’21 numbers.”
Between now and then, investors will have a lot to process. Fitch believes 2020 will see leisure business in the U.S., which includes gaming, hit the hardest of the 87 sectors covered in its report, with “revenue destruction” in the realm of 40 to 60 percent.
To the degree this proves accurate, it will occur against the backdrop of a nation approaching a presidential election more divided than at any point since the eve of the Civil War, amid unemployment numbers not seen since the Great Depression, amid widespread social unrest and with a dreaded “second wave” of coronavirus infections all but certain to arrive by September and worsen into the fall.
“It could all mean nothing, but we don’t really know,” Boyer said. “It’s an incredibly unstable domestic picture. It’s very tricky.
“Can gaming continue to be a relative out performer in a generally stagnant market? We don’t know enough to say.”
