Here’s a word you don’t hear very often in regard to U.S.-listed casino stocks: growth.
And here’s a phrase you hear even less often: growth now.
For those companies that credibly offer growth now, investors are willing to pay up. For the rest of them, well…
Those conclusions have long been our thesis in evaluating the near- and mid-term outlooks for casino stocks. Now, Jefferies equity analyst David Katz has issued a report that comes to the same conclusion, except with more numbers to support the case.
Katz, who has been around the block a few times and is one of the best sell-side analysts, also lands on the same names we’ve seen as offering growth in both profits and stock prices: Red Rock Resorts and Churchill Downs among operators, and in a separate report, supplier Light & Wonder.
This doesn’t mean that Katz doesn’t see positive investor returns in others. He has ‘buy’ ratings on Caesars and MGM Resorts, though he lowered target prices to $51 each.
It’s that investors want growth.
Red Rock and Churchill are the only casino stocks in his coverage universe selling at valuations higher than their five-year median multiples of enterprise value to EBITDAR. Red Rock is at 10.2 times vs. 9.6 times and Churchill is at 12.3 vs. 11.9. Red Rock is growing earnings based on both current and future growth projects; likewise for Churchill Downs, thanks to its expanding network of historic racing machine operations and continued development of its Kentucky Derby franchise.
Other companies have growth in the works. Wynn has its 40 percent-owned resort to be built in the United Arab Emirates. MGM expects to transform Empire City racino in Yonkers, New York, into a full casino and to develop Japan’s first and, so far, only integrated casino resort. But those projects aren’t this year or next. Wynn’s UAE opening is likely 2027, Empire City not until 2026 and Japan way off to 2030. Investors aren’t paying up to wait.
Red Rock and Churchill aren’t making them wait.
Neither is Light & Wonder. Katz sees earnings per share rising from 80 cents last year to $4.37 this year and $6.23 next year. Now that’s instant gratification (even though it’s not so instant in that Chairman Jamie Odell and CEO Matt Wilson have been rebuilding Light & Wonder for a while).
Nor are investors seeking value if growth isn’t attached.
Katz points to Golden Entertainment and Boyd Gaming, and mentions Monarch Casino, in what we’ll call the value category.
Golden has debt-to-EBITDA of just two times and owns 98 percent of its real estate in fast-growing southern Nevada, yet the stock sells at just 7.1 times enterprise-value-to-EBITDAR compared to its five-year median of 8.8 times. Boyd, with debt-to-EBITDA of just 2.7 times and owning more than two-thirds of its real estate, sells at 7.2 times enterprise-value-to-EBITDAR compared to its five-year median of 7.9 times, Katz notes. And Monarch actually has a net cash position. It also is worth pointing out that all three pay a dividend, with Golden yielding over 3 percent.
So those companies share strong value metrics. What they also share is no significant near-term growth plans.
Note: These companies will say they do have growth projects. They have property renovations. Boyd has several capital projects; Monarch will discuss the continuing maturation of its Black Hawk, Colorado, expansion; and Golden is adding several taverns a year in Las Vegas. But all those are basically incremental, not transformational.
Of course, in a mercurial world, steady, prudent and dividend-paying can win the race. But at this moment in time, investors want needle-moving growth. And they want it now.
