Call it waiting for the shoe to drop.
Gaming companies largely reported strong first-quarter earnings and, more importantly, continued to report healthy business trends as they repeated bullish outlooks, but you won’t see that in the stock prices.
A few stocks have risen appreciably since earnings season began in mid-April. Churchill Downs is up around 15 percent as the company continues to execute on the clearest and most steadily ambitious growth plan among gaming operators. DraftKings has jumped 25 percent as, once again, investors are putting their money on the promise of future profits.
But most gaming stocks are flat to down, no matter results or outlooks.
Take Wynn Resorts—it is down several percentage points despite reporting blow-out numbers, despite the near euphoria over the reopening of China and its impact on Macau, despite benefitting from a booming Las Vegas Strip and despite its own property investments designed to grow revenue both near and long term. And, to boot, Wynn initiated a dividend calling the return to shareholders a central part of its capital allocation strategy. To use a highly technical term—jeez!
Then again, most Macau gaming stocks are down. So much for euphoria.
Some of the trends in stock prices occurred in anticipation of earnings announcements. Macau stocks, for example, had a very strong run ahead of earnings. That benefitted investors who got in early and who now can afford to wait on further gains, or those who bought in anticipation and sold on realization.
All of that aside, gaming stocks largely continue to sell at low valuations both compared to their earnings and business prospects and, as has been historically the case, compared to sister industries in travel, leisure and entertainment.
And it has happened as companies continue to reduce debt and leverage ratios, softening the impact of higher interest rates.
So, why the gap between performance and stock prices?
The main reason would appear to be concern over the likelihood of a general economic recession, and the effects of inflation and those higher interest rates.
Unfortunately, those concerns are more than theoretical. Several companies reported higher costs, especially for labor. Some of those costs made big dents in profit margins, hence in otherwise expected profits. Ditto for higher interest rates.
Economists can debate the likelihood of a recession occurring later this year or in 2024, but the actual experience is that certain customer segments are declining, mainly low-value and unrated players. And some recent regional gaming revenue reports have been year-over-year negative.
Of course, there are positive industry-specific trends such as the return of international travelers and a full slate of conventions, both trends more important to the Las Vegas Strip than to regional and local operators. Las Vegas, at least for the next year, also can offset at least some overall economic weakness because of its extraordinarily strong special events calendar with such ballyhooed happenings as a Formula 1 race this year and the Super Bowl come February.
But a recession will affect revenues. The much-publicized trend towards experiential travel can’t hold up if the traveler is out of a job.
The questions will not be whether a recession hurts the gaming industry, but rather how much and for how long.
