Regional casino stocks have been hammered this year. Among the worst hit as of this writing, from their 52-week highs:
Boyd Gaming -34 percent
Red Rock Resorts -39
Penn National -47
Golden Entertainment -61
The declines can be blamed on some less than stellar financial performances, a few company-specific concerns and a growing fear that recession is looming.
Arguments can be made that each of these stocks will benefit in coming quarters by performances that reassure investors. Analysts largely expect Boyd and PENN to meet their financial guidance. Red Rock will have its expensive renovations of Palms Casino and Palace Station behind and should accelerate cash flow growth. Golden has lowered expectations of investors who appeared to have been too eager for its growth to kick in and interestingly, if not ironically, that growth is closer at hand.
So, we’d say, we should be able to look back two or three quarters from now and see that the summer was a buying opportunity. Unless, of course, a recession hits.
But a recession might not be as big a negative this time.
A case can also be made that the recession of 2019 or 2020 or 2021 will not be like the Great Recession of 2007 to 2009. That was the worst economic downturn since the Great Depression, which wiped out the wealth of millions, took a long time for recovery and severely damaged the banking system.
The next recession is more likely to be a more conventional business cycle recession, and like others of modern times, less severe.
That doesn’t mean no pain. Revenues will decline. Companies need to continue to strengthen balance sheets so they don’t run into technical defaults as EBITDA declines during the tough going.
And casino companies have become more efficient and are working to maintain manageable debt.
Plus, there are still two important catalysts for stocks: 1) mergers and acquisitions should continue, facilitated by REITs, and 2) in the case of Golden Entertainment, Red Rock and Boyd Gaming, investors can take comfort that demographics are the future. In other words, Las Vegas remains one of the nation’s fastest-growing metros, a phenomenon that should continue as long as Americans move to the Sunbelt.
Golden and Red Rock should especially benefit because 1) they are almost pure plays on southern Nevada growth and 2) they own their real estate, which should give them higher valuations and make them more attractive acquisition targets.
Special Situations
Not all regional casino operators are down sharply.
Churchill Downs and Eldorado are near their highs. Investors are optimistic that Churchill Downs will benefit from Illinois gaming expansion. And they have confidence that the management team at Eldorado can continue to extract value from companies it acquires, which increasingly looks like that might include Caesars Entertainment.
Caesars stock itself, while down around 20 percent from its 52-week high, has slowly strengthened in anticipation of a buy-out.
It is worth noting that Caesars’ largest shareholder, Carl Icahn, wants the company sold, and Icahn has batted one thousand as an investor in casino companies and properties.
Finally, if Eldorado buys Caesars, there will be jurisdictions where it must sell properties, opening opportunities for other companies to become buyers in likely profitable, deals.
In summation, this might be a time of opportunity in regional casino stocks.
