Regional Casino Operators Face Challenging Growth Climate, Says Analyst
Regional casinos face what Deutsche Bank analyst Carlo Santarelli terms a “slow bleed” in terms of gross gaming revenue (GGR), suggesting that most of the group's overall growth is derived from new locations rather than increases in same-store sales.
After the unfavorable weather in January that led to fewer visitors, analysts and investors hoped that the ongoing quarter might show better results for regional casino GGR. However, Santarelli warned that this expectation might not be confirmed.
"When looking ahead to the 2Q24 and beyond, we believe the sentiment that easier compares will manifest in an improved cadence (growth) in GGR is likely misguided to some degree,” observed the analyst. “While compares will ease in the 2Q24, we don’t necessarily expect, nor do we model, a return to growth, as we see moderating declines, though still negative comparisons.”
Although activity on the Las Vegas Strip is still lively, indications show that elevated interest rates, persistent inflation, and various macroeconomic challenges are impacting certain gaming locations in the Midwest and South. Similarly, six out of the nine casinos in Atlantic City, NJ saw their profits drop last year as a growing number of locals turned to iGaming.
Certain figures from regional casinos seem misleading.
Among the states with gaming facilities labeled as regional casinos, only Colorado has recorded GGR growth this year, whereas an additional 10 experienced declines of 2% or greater.
The figures for March in Michigan were poor, with a drop of 1.6%, while the growth in Illinois is thought to be fueled by new establishments like Bally’s (NYSE: BALY) and Full House Resorts’ (NASDAQ: FLL) temporary casinos, as same-store sales in Illinois decreased by 6.7%.
The contributions from Bally's temporary casino in Chicago are contentious, as Illinois Gaming Board (IGB) data show that the site only exceeded the performance of two other casinos in the state regarding March GGR.
“While GGR can often mislead and lull investors into a false sense of security, we don’t believe promotional strategies have altered materially in the 1Q24,” added Santarelli. “We continue to see certain operators in certain regions acting somewhat promotional, though broadly, behavior is unchanged on a quarterly sequential basis.”
Regional Casino Stocks to Favor
In the realm of regional casino stocks, Santarelli showed a liking for Boyd Gaming (NYSE: BYD), Golden Entertainment (NASDAQ: GDEN), and Red Rock Resorts (NASDAQ: RRR). All three have something in common: significant exposure to the local market in Las Vegas.
Among that trio, only Boyd manages gaming establishments beyond the Las Vegas Valley. The firm is the biggest operator in downtown Las Vegas and possesses several favorable catalysts.
“We believe buyside sentiment, and as such, valuations, likely beget a favorable risk reward for several names. Amongst the solely regional / drive-to operators, we continue to like BYD, given: 1) the healthy balance sheet and capital returns, 2) the LV locals exposure, 3) the growth in the LV Downtown segment, 4) the FanDuel stake, and 5) broader optionality and flexibility to drive growth through returns on investments,” concluded Santarelli.
