As has been mentioned in this space recently, a key to investor reaction to first-quarter earnings conference calls will be commentary around the forecasted effects of inflation on casino customers.
The premise of the question has been whether optimism over current and even near future trends in business have been carrying gaming stocks upwards and might be setting them up for a fall.
The hints of softer business ahead have become more frequent, including surveys showing that consumers are or intend to slow down spending on travel and entertainment. Those hints fly against the gale of optimism as companies in travel and entertainment continue to report strong, even record demand and predict more to come as the economy remains strong and bank accounts remain full.
Now, some sell-side analysts peering into the next set of quarterly reports are sounding similar caution.
Shaun Kelley of Bank of America/Merrill Lynch cautions that he expects “slight (earnings) beats but recession concerns (to) weigh on sentiment” as companies report and guide.
Acting on such caution, Kelley cut targets on several gambling operators:
- Penn National by 16.1 percent
- Wynn by 15.0 percent
- Caesars by 13.6 percent
- MGM by 9.1 percent
Barry Jonas of Truist likewise slightly lowered targets on Penn National, Caesars and MGM. “Fear of tomorrow (is) offsetting fundamentals today,” he wrote.
And Kelley and Jonas are not bears. Jonas, for example, maintains buy ratings on PENN, Wynn and Caesars.
One sector within gaming that may show strength comprises the Nevada-focused regional casino operators—Red Rock Resorts, Boyd Gaming, Golden Entertainment, Monarch Casino and—throw in one non-Nevada operator—Churchill Downs.
Red Rock and Golden are nearly pure plays on thriving and growing southern Nevada. Churchill Downs has its potential low-risk, high-return growing empire of historical horse racing machines; and Monarch has its new destination resort scale property in Black Hawk, Colorado, driving growth.
Monarch has long been understood by investors who follow it as an unalloyed growth story. Monarch Black Hawk is throwing off cash, which the company is using it to pay off debt and what will be left is a debt-free business with relatively huge free cash flow.
That understanding has been gaining adherents, resulting in Monarch stock hitting all-time records.
Has Digital Bottomed?
The plunge in iGaming stocks is now as well-known as was their rocketing last year to unsustainable highs.
Three publicly traded pure plays—DraftKings, Rush Street Interactive, Golden Nugget Online—are all down more than 70 percent from their highs.
The hybrids have been hit, too: Penn National down 66 percent, Flutter, which owns 95 percent of FanDuel, down 52 percent, and Caesars dropped 35 percent.
A case can be made that now is the time to buy these stocks. Their catalysts might be as simple of management offering tangible evidence of spending coming under control and credible forecasts for reaching profitability reasonably soon.
Certainly, Caesars and PENN have their huge brick-and-mortar businesses to support their online ventures. And both companies have credibility with investors that they can deliver on their promises.
One interesting dynamic is the steady dominance of market share by DraftKings, FanDuel and Bet MGM, the joint venture of MGM Resorts and Entain.
Market shares have shifted and Caesars has been steadily gaining share. But what might be called the Big Three continue atop the heap. For example, in March they accounted for 72 percent of revenue share in Michigan, New Jersey and Pennsylvania combined.
That raises the question of whether some structural changes might occur to benefit shareholders. For example, would Flutter spin off FanDuel? Would MGM and Entain spin off Bet MGM? Would DraftKings at some point be a takeover target if it can’t achieve profitability on its own?
