Economist Expresses Pessimism about Casino Stock Valuations due to Economic Concerns
United States Commercial Casinos: The Ups and Downs
Let's dive into the turmoil facing the casino sector, as analyzed by market guru David McKee. Taking a grim perspective, McKee has lowered his cash-flow and revenue expectations for gaming companies in a recent investor note.
McKee starts by discussing Macau, a region where revenues are stuck 20% to 25% below pre-COVID levels. First-quarter earnings were 25% lower than the same period in 2019, leading to reduced forecasts for Las Vegas Sands and Wynn Resorts.
The trade war between China and the US is looming large, and McKee warns about the potential impact on the market and its operators. His research suggests that Macanese authorities anticipate near-term effects from the escalating trade strife, raising questions about long-term consequences for US-traded operators.
Transitioning to Las Vegas, McKee lowers his projections for Caesars Entertainment, leaving the numbers for MGM Resorts Entertainment and Wynn Resorts unchanged. He notes that discussions with management teams indicate that volumes, pricing, and margins are more or less as expected. However, international inbound travel and group business are areas of interest moving forward.
Regional casinos are expected to remain competitive and unpredictable. McKee reduces projections for Boyd Gaming, Station Casinos, Churchill Downs, and Caesars Entertainment due to flattish same-store market growth and the impact of tariffs on material costs and digital strategy.
Despite the reduced valuation, Boyd remains a top pick for McKee, thanks to its commitment to regional casinos and a perceived undervaluation of its stake in FanDuel. Station faces hurdles due to a large portfolio of property upgrades, increased leverage, and near-term disruption resulting from expansions, further complicated by the current economic climate.
Sands is labeled a disappointment by McKee, who had predicted the Londoner suites to re-enter the Macau market and position Sands to capture market share. However, this has not occurred, but he maintains that the underlying thesis for Sands in Macau remains solid.
Looking ahead in Macau, McKee concedes that visibility is low for the rest of the year. He reduces Wynn Resorts estimates to reflect current trends, making note of considerable land value in Las Vegas that is currently not contemplated in his valuation.
Caesars' future is uncertain due to competitive pressures, particularly in Louisiana and Indiana, where new competitors have neutralized the positive impact of property upgrades. This trend appears to be continuing in the current quarter.
Churchill Downs faces challenges with its large expansion project, which is weighing down share performance. The company recently opened The Rose casino in Virginia and has committed $900 million to upgrading its racetrack in Louisville. These projects, along with others, keep the company's leverage elevated, affecting share appreciation.
The trade war's impact is multifaceted, with indirect effects on the casino industry arising from the broader macroeconomic environment. Online casinos and digital gambling businesses are particularly vulnerable to operational disruptions in technology, finance, and regulatory compliance, as well as market access restrictions, financial and tech infrastructure disruptions, and regulatory instability. These challenges produce share price volatility, disrupted access to customers and platforms, and increased uncertainty regarding future regulatory environments.
- Jefferies analyst David McKee, in a pessimistic note to investors, has lowered his cash-flow and revenue expectations for the casino industry, particularly for gaming companies like Las Vegas Sands and Wynn Resorts.
- In Macau, McKee highlights that revenues are 20% to 25% below pre-COVID levels, with first-quarter earnings 25% lower than the same period in 2019.
- McKee raises concerns about the potential impact of the trade war between China and the US on the casino-and-gambling industry, suggesting that Macanese authorities anticipate near-term effects from the escalating trade strife.
- Regarding Las Vegas, McKee is more optimistic about MGM Resorts Entertainment and Wynn Resorts compared to Caesars Entertainment, citing that volumes, pricing, and margins are as expected in discussions with management teams.
- Online casinos and digital gambling businesses face operational challenges due to the trade war, as they are vulnerable to disruptions in technology, finance, and regulatory compliance, as well as market access restrictions, financial and tech infrastructure disruptions, and regulatory instability.
