We are about to enter first quarter earnings report season and, for the first time in a while, casino operators might miss expectations.
Much of that will be attributable to the severe winter weather, and some to the continuing lag of the Las Vegas Strip that began with the Mandalay Bay shootings six months ago.
Two analysts, David Katz of Jefferies and Dave Bain of Roth Capital, have trimmed forecasts on two of their favorites because of the weather, Katz on Penn National and Bain on Eldorado Resorts.
However, they remain bullish. Katz basically maintained his buy rating noting that Penn will sell at just 7.4 times expected 2019 EBITDA after its acquisition of Pinnacle Entertainment, and a price of 8.6 times free cash flow is compelling, he said.
Bain likewise sees Eldorado performing up to expectations after factoring out for a rough first quarter that he thinks will knock down EBITDA by around $10 million to $103.2 million.
Additionally, Bain pointed out, gaming revenues so far reported from March show a strong rebound from storm-ravaged February.
In the end, both analysts maintain their ratings and targets: Katz’ $37 on Penn and Bain’s $42 on Eldorado.
The mixed first quarter might give more weight than usual to the trends regional casino executives see so far in the second quarter, and to advance group and hotel bookings that Las Vegas Strip operators see.
A Word Of Caution
Talking about the Strip, Telsey analyst Brian McGill has issued a cautionary outlook, and it doesn’t have to do with the Mandalay Bay shootings. It is about the new hotel capacity and other capital projects in the works.
When Resorts World and The Drew open in two years, they will add 7,400 hotel rooms, which, to get their expected return, would require 1.25 million additional visitors to Las Vegas on top of the current 42 million, a figure that has been basically flat for three years, McGill reported.
Looked at another way, those two projects, plus other expansions and renovations now occurring, total $6 billion. To get mid-teens returns would require spending to rise 20 percent while it’s been rising just 3 percent a year, McGill said.
In this atmosphere, it would be best for Wynn Resorts to not build 3,000 to 4,000 hotel rooms in Project Paradise, McGill said. He thinks Wynn will add some amenities and convention space and put the room additions on hold.
One project McGill seems to think can get its return is Golden Entertainment’s $131 million renovations at Stratosphere that, as he noted, under performed under previous ownership.
McGill is even cautious on the new sports teams, noting that Las Vegans have only so many entertainment dollars to go around.
Las Vegas historically has been a build-it-and-they-will-come city. We’ll see if that continues to hold true. Meanwhile, McGill’s analysis deserves to be considered.
Kudos To Wynn
Nobody knows how the regulatory investigations into Wynn Resorts related to former CEO Steve Wynn’s sexual misconduct allegations will play out. But, to date, current management appears to be playing it about as well as possible.
Evidence is in the stock price, which, after falling from $200 to the low $160s in the early days of the revelations, has rebounded to over $180.
Perhaps the most positive action was selling a 4.9 percent stake in WYNN to Galaxy Entertainment, the Hong Kong-listed Macau casino operator, a sign that very astute people in the industry are willing to make a substantial bet on the company.
Meanwhile, Wynn has other well-publicized options such as selling the Boston Harbor project, selling parts of the company, selling the whole company, and continuing to operate as the industry’s high-end resort company.
In other words, while the future of Wynn Resorts may be uncertain, stock investors appear secure at this point.
