There have been two themes among gaming stocks during the early days of 2023:
- Macau casino stocks have shot up dramatically, first in relief that gaming concessions were renewed on a non-draconian basis, and more recently on the about-face done by the national Chinese government on Covid restrictions.
- Stocks elsewhere have slogged along as investors face the unpleasant reality that interest rates will continue to rise and won’t start backing down for perhaps more than a year.
As readers of this space know, we recently dropped our long-time bearish position on Macau stocks, mostly out of belief that 2022 was the bottom. We did, however, warn that this represents just a trading opportunity, as the long-term policy of the national Chinese government will remain anti-gambling.
The time already might have arrived to turn off the green light and flash a yellow warning to suggest that investors who bought Macau stocks as a trade consider cashing out at least part of their positions.
One reason for caution is that the easy pickins’ have been made. For example: shares of SJM, MGM Macau and Melco have tripled from their 52-week lows. Wynn and Las Vegas Sands are up around 80 percent. Other Macau stocks are up similarly.
What does the future hold? Credit Suisse, for one, has projections that should give pause for thought. The firm projects 2024 gaming revenues at 60 percent of 2019 levels, yet price/earnings ratios at 23.5 times vs. 14.5 times, enterprise value-to-EBITDA at 14.5 times vs 9.3 and free cash flow yields declining from 7.3 to 5.8 percent.
Credit Suisse does like Sands China and MGM China citing valuation, earnings recovery, balance sheets and non-gaming revenues.
Still, Macau’s full recovery is unlikely and, as the old saying goes, no one ever went broke taking a profit.
Meanwhile, central banks worldwide have gotten religious on inflation and we have entered one of those otherworldly eras in which good news is bad news—greater prosperity means more fear of future inflation, which causes the central banks to raise interest rates, which causes stocks to tank, both as higher rates create competition for investor dollars and as fears of recession grow.
For gaming companies, these raise the questions of whether consumer spending will decline in the seemingly inevitable recession, taking gaming revenues with them, and whether recession-skittish casino operators cut back on capital spending, including money otherwise intended for slot and table games.
Our view of the impact on U.S. brick-and-mortar operators remains somewhat sanguine, especially for Las Vegas where business recovery continues as international travel resumes, the convention schedule returns to normal and the events calendar is strong. All of that should benefit the likes of MGM Resorts, Wynn and Caesars.
Meanwhile, the strong Las Vegas economy and population growth underpin locals operators such as Red Rock Resorts, Golden Entertainment and Boyd Gaming.
Regionally, sports betting proliferation will continue to be used by operators to cross-market players into casinos, adding business that wasn’t there in previous recessions. And, of course, sports betting itself is a rapidly growing revenue source, though it has yet to be made profitable.
Casino operators have another strength to protect against recession and/or higher interest rates—sound balance sheets.
For the most part, operators have little to no debt maturing through 2024 giving them time, and perhaps enough time, to ride out the interest rate crest.
So there you have it: be cautious on Macau and more confident in U.S. casino operators.
