As first-quarter earnings and investor reactions to them pour in, two things have become obvious:
1) Gaming stocks are getting little to no respect and many have entered the realm of value plays, maybe even deep value.
2) With gaming’s growth era now surely behind, picking the right stocks has become the way to go; no more picking sectors within the sector, and that includes digital plays for those still enamored with the sub-industry’s revenue growth.
Here are some brief thoughts on a few companies that have reported so far:
SHOW ME
PENN Entertainment and Caesars Entertainment are no longer investor darlings. They might have become the opposite. No longer can the boyish enthusiasm of PENN CEO Jay Snowden nor the firm reassurances of Caesars CEO Tom Reeg persuade investors that better days are just around the corner.
Investors want meaningful results, and soon.
For PENN, investors focus on the losses at its ambitious online operations, including the much-heralded ESPN BET. But overall issues are greater. Regional brick-and-mortar business is no longer a growth vehicle. Now a tenant more than a land owner, PENN has rent-adjusted leverage of 7.2 times, a hefty sum. Deutsche Bank analyst Carlo Santarelli sees that peaking at 9.2 times before receding to 5.3 times by the end of 2025.
Still, there are reasons to like PENN. Its $2.3 billion market cap is ridiculously low for a company that will generate over $1.7 billion in EBITDA next year. It’s hard not to share Snowden’s bullishness for the online business that he so enthusiastically describes.
In the end, May of 2024 might prove to have been the low point and the time to buy the stock.
Caesars also has online operations that have been a drag, though that’s turning around and Reeg pretty forcefully says it will be a half-billion-dollar contributor to EBITDA starting next year.
For me, the risk is that Caesars has so cut operating costs that its properties just aren’t fun anymore. People don’t visit casinos to appreciate how little staffing they have. They go for fun. My presumptuous suggestion is that the company hire a Chief Fun Officer and give the guy or gal some authority and a good-size budget.
As banking entrepreneur Vernon Hill used to say, you can’t cost-save your way to prosperity.
Meanwhile, the underlying math suggests the stock is way undervalued. Citizens JMP analyst Jordan Bender, for one, sees free cash flow per share next year at $6.63. That screams for a stock price north of $60 compared to today’s mid-$30s.
SHOWED ‘EM
Thankfully, even in desultory periods, there are bright spots. This time they are provided by MGM Resorts and Churchill Downs.
MGM blew to a record first quarter driven by Las Vegas and Macau. CEO Bill Hornbuckle makes the strong case that there’s more to come, especially in Las Vegas where its properties along the south Strip are where the action is. The sports arenas and stadiums there fill a million seats a year, as an example.
It doesn’t hurt that MGM has upscale properties in this era when low and mid-level players have been scaling back.
MGM has a realistic, step-by-step growth plan and a commitment to shareholders. Asked on the company’s earnings conference call about uses for excess cash, Hornbuckle responded quickly and clearly: share repurchases. The company has reduced its share count by 37 percent since 2021. That’s commitment.
Churchill Downs just keeps hitting doubles and singles and driving in runs. It turned in another record quarter. The stock isn’t cheap, at least not in comparison to other gamers, but it isn’t expensive compared to its growth. And given the lack of growth among gamers generally, that gives it value the owners of the cheap stocks might wish they had.
BEN’S FAVORITES?
Ben Franklin observed that in this life, nothing is certain except death and taxes. Today, he might add gaming REITs.
Once again, Gaming & Leisure Properties and VICI Properties turned in unspectacular quarters of steady growth.
Their dividend yields are now 7 and 5.7 percent, respectively; and they grow every year. That, VICI CEO Ed Pitoniak noted on his conference call, doesn’t just beat inflation. It is a growth component that bonds don’t provide to income investors. VICI’s dividend has grown at an annual compound rate of 7.9 percent since 2018, he observed.
VICI and Gaming & Leisure even have built-in growth engines. An example is the $700 million VICI is making available for tenant Venetian Las Vegas to expand. That isn’t just helping Venetian owner Apollo Management make more money, but is increasing the value—and thereby the rent—it will pay to VICI.
Then there’s the reliability of tenant payments. Remember Covid? Lots of office tower and shopping mall REITs had to endure non-payment from tenants. Casinos, however, kept paying their rent.
Today, there is discussion of whether consumers, especially at the low end, are pulling back on entertainment spending. But that isn’t affecting the ability of casinos to pay their rents. In other words, VICI and GLPI are largely insulated from modest business dips and cycles.
Or, as Ben might have said about them, what’s not to like?
