Regional Casino Stocks Seen Extending Gains Following Sloppy Q1

Posted on: April 19, 2021, 09:56h. 

Last updated on: July 7, 2021, 02:26h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of regional casino operators can rally following a challenging first quarter, according to Bank of America analysts.

regional casino stocks
Boyd Gaming’s Main Street Station in Las Vegas. Bank of America is bullish on regional casino operators. (Image: Las Vegas Review-Journal)

While year-to-date returns for operators such as Boyd Gaming (NYSE:BYD), Caesars Entertainment (NASDAQ:CZR), Churchill Downs (NASDAQ:CHDN), Penn National Gaming (NASDAQ:PENN), and Red Rock Resorts (NASDAQ:RRR) are broadly impressive, regional gaming stocks are trading well off recent highs, as some analysts question valuations, while speculating late 2020 enthusiasm for the group was too much, too soon.

Gaming companies with expansive regional portfolios, such as Boyd, Caesars, and Penn, started this year in an upbeat fashion. However, January and February demand was slack, owing to lingering coronavirus restrictions and bad weather in some parts of the US. In better news, Bank of America says March was better and things are looking up for casino companies with large non-destination market exposure.

Four of the seven states — Iowa, Maryland, Missouri, and Ohio — that have reported have set all-time monthly gross gaming revenue records, +11 percent from 2019 levels on average,” according to a team of analysts from the bank.

A silver lining from the pandemic is that operators with less destination market exposure found new cost efficiencies, many of which are likely permanent, providing ballast to long-term margins.

For Regional Casino Stocks, Familiar Catalysts Remain

Whether it’s operators like Boyd and Red Rock that derive significant chunks of earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue from Las Vegas locals, or companies such as Penn, with large exposure to the Midwest and South, sparks for regional casino equities are uniform.

Wall Street is mostly positive on regional operators, based on the familiar refrains of pent-up demand and increasing levels of COVID-19 vaccination. The latter factor is viewed as integral to luring gamblers 55-years-old and up — a marquee demographic — back to local casinos.

“We think pent-up demand and a return of older gamblers should drive upside in coming months. But less promo and non-gaming could still keep reported net revenue below pre-COVID levels,” said Bank of America.

Online, M&A Outlooks

As vaccination rates improve and pent-up demand takes shape across the US, regional casino stocks have other levers to pull to deliver for investors.

Those include state-level expansion of online casinos and sports wagering and industry consolidation. Entering 2021, there was ample chatter that the back half of this year could bring a flurry of mergers and acquisitions activity among regional operators — a thesis affirmed by Bank of America.

“We believe margins could be messy in Q1. But we expect most managements to remain constructive on the long-term outlook. Online ambitions, strategies, state launch timing, and potential M&A will also be a focus,” said the research firm.

It didn’t identify specific buyers or sellers.