Analyst favors gaming to emerge from winter of discontent

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Although the S&P Index has risen six percent so far this year, the increase hasn’t been reflected in gaming stocks. Casinos are down eight percent, manufacturers five percent, and REITs 14 percent.

In a report published Tuesday, Truist Securities analyst Barry Jonas noted that gaming stocks are off, “but consumer discretionary spend (especially on casino floors) remains sturdy in the face of continued macro-uncertainty.”

Going into earnings season — or “coming out of hibernation,” as Jonas put it — two operator stocks enjoyed particular favor. The analyst liked MGM Resorts International for its Las Vegas Strip positioning and Churchill Downs as long as the ban on skill games in Virginia remains in place.

Jonas added that Penn Entertainment deserved an upgrade, because its “risk/reward looks too attractive, even if the market doesn’t give any credit for ESPN Bet.” Most other interactive operators were seen as being on pace to become profitable, DraftKings in particular for being “best positioned.”

As for the tech sector, both AGS and Light & Wonder were described as “idiosyncratic catalysts [that] could move the needle for both companies, especially in light of recent M&A” activity.

The analyst tweaked certain price targets upward, moving Station Casinos to $60 a share from $58 and Bally’s Corp. from $14 to $16. Trending downward were Caesars Entertainment, from $62 to $58, Golden Entertainment (down from $45 to $44), International Game Technology to $26 (from $28) and Everi Holdings from $13 to $11 per share. Despite missing earnings targets earlier this week, Monarch Casinos & Resorts was unchanged at $74.

Jonas evinced some concern about interest rates, writing, “While we were optimistic at the start of the year that rates would be headed downward this year, recent Fed commentary has added uncertainty to rate cuts this year.”

The ramifications for gaming are that a stable environment would prompt great merger-and-acquisition activity, particularly sale/leasebacks of casinos from REITs. However, “This thesis is likely delayed while the Fed attempts to combat stubborn inflation.”

However, Jonas allowed that operators were prioritizing deleveraging their balance sheets at the moment, which would allay the effects of unstable interest rates. “But absent M&A and predictable organic growth, many of our names are stuck in value land.”

The impact of interest rates showed up particularly in the cases of gaming REITs Vici Properties and Gaming & Leisure Properties, both sharply down in price. Jonas thought the present time to be a difficult environment in which to close deals, although that might pick up if interest rates stabilized.

Any gains that casinos had made in March were seen as having been negated or worse by harsh weather in January. A Super Bowl-prompted upside for the Las Vegas Strip was projected as continuing through May, but not into June. Jonas added that the NFL tilt was a mixed bag for gambling, with MGM benefiting and Caesars not.

In the Las Vegas locals scene, Durango Resort was perceived as hitting the competition hard, save for Boyd Gaming, whose leadership described seeing scant Durango impact. Golden was believed to be experiencing midweek debility “though [we] see Atomic Golf as driving upside ahead.”

Regionally, Boyd was said to be looking better than initially thought. As for competitor Bally’s, Jonas noted that the share price was approaching Standard General’s $15 offer, but the sum of Bally’s parts might justify an even higher bid.

Despite mixed holds for online sportsbooks, Jonas said interactive revenues continue to climb, with DraftKings’s high mix of parlay wagers helping to cushion the blow when players won big. “Elsewhere, we think other players are still ramping up their products in various phases of investment, not without risks for success,” he wrote.

Although North Carolina recently launched OSB and Rhode Island igaming is in its early innings, Jonas kept his powder dry where further expansions were concerned. He observed, “The legislative path this year looks uncertain at the moment, though things can always change.”

Concluding with the tech sector, Jonas continued to smile on the setup for AGS, citing “strong product momentum” and positive potential for market-share gains during the IGT/Everi merger process. He felt that the latter two stocks were limited in potential, as long as they were tied up in the regulatory-approval process.

While noting that Light & Wonder “trades at the highest multiple in our gaming-tech coverage,” Jonas allowed that “the continuing success of its Dragon Train game could mean sizable upside to numbers.” As for Inspired Entertainment and, they both merited continued “Buy” ratings in Jonas’ view.

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