As we wait for the first fourth-quarter earnings reports in the coming days, it’s worth noting the less-than-buoyant expectations for gaming stocks.
Two of the most recent examples come in comprehensive reports on the gaming industry outlook by sell side analysts Steve Grambling at Morgan Stanley and Shaun Kelley at Bank of America.
Grambling said he “is taking some chips off the table to reflect a more tempered view on our coverage” though he sees several instances of upside to consensus expectations and of low valuations.
Grambling backs up that overall view by cutting targets on five of the eight companies he follows while modestly raising them for DraftKings, Penn Entertainment and MGM Resorts.
Kelley sums up his view saying, “The last three years have been all about Covid recovery, but 2024 should return to the laws of supply and demand, which for gaming aren’t that exciting.”
On the positive side he sees revenue growth—2 percent in Las Vegas, 1 percent for U.S. regionals and a whopping 20 percent in Macau. Kelley also sees 20 percent growth in U.S. online revenues. However, he forecasts modest EBITDA declines in the U.S. thanks to inflation and costs added by new union contracts.
Grambling also sees modest U.S. revenue growth—0.3 percent on the Las Vegas Strip and 0.7 percent regionally.
Both analysts see some upside opportunities in various regions and for various companies. Kelley, for example, points to Penn National’s new ESPN Bets sports betting operations and MGM Resorts perhaps resolving ownership of its now 50/50 BetMGM joint venture with Entain. He also cites Caesars’ ability to cut debt as it receives $2 billion from real estate sales and the potential of its new property in Danville, Virginia.
Perhaps most interesting are that, even given the modest outlooks, both analysts cite valuations below historic norms.
Kelley lists enterprise value-to-EBITDA, which historically has averaged 10 times in the U.S. for the industry. At present, Las Vegas Sands is 7.3 times, PENN 6.9 times, MGM 7 times and Caesars 7.7 times. Wynn is closer at 9.6 times, but well below its own 13.7 historic average.
In other words, despite an unexciting revenue outlook, there could be value for patient investors. That’s our view, not that stated by Kelley or Grambling.
Caesars seems especially cheap on a value basis. Kelley points out that the stock trades 35 percent below its peak of enterprise value-to-EBITDA and it has a free cash flow yield of 15.1 percent not counting online.
Given that CEO Tom Reeg and his executive team are considered among the best blocking-and-tackling operators and given the aforementioned catalysts (we’ll also throw in making online profitable and potential returns from a variety of capital improvement projects winding up), one has to wonder if Caesars will be discovered by value investors who also like a dose of growth.
For the record, Grambling has overweight ratings on DraftKings and Las Vegas Sands. Kelley has buy ratings on Boyd, DraftKings, Penn and VICI Properties.
