JPMorgan released a broad look at the gaming industry today, highlighting Boyd Gaming (NYSE:BYD), Caesars Entertainment (NASDAQ:CZR) and Red Rock Resorts (NASDAQ:RRR) as its top three ideas among the casino stocks it rates “overweight.”
Each of those names is tethered to the ongoing recovery in Las Vegas, which could be threatened by the delta variant of the coronavirus. JPMorgan says the emergence of the latest COVID-19 mutation isn’t yet hampering fundamentals for operators with deep Sin City exposure. But the bank acknowledges investor sentiment could ebb and flow with case count and vaccination headlines.
Caesars is the second-largest operator on the Strip, while Boyd is the dominant company in downtown Las Vegas. Both Boyd and Red Rock generate significant portions of earnings and revenue from Las Vegas locals (LVLs) — a demographic consisting largely of retirees and staffers from other casinos. Operators with strong LVL exposure reported stellar second-quarter results. But that segment could be challenged if the pandemic takes a dramatic turn for the worse. Still, JPMorgan is bullish on the aforementioned trio.
Favorable position in the attractive LV locals market with RRR converting a high percentage of earning before interest, taxes, depreciation and amortization (EBITDA) to free cash flow (60-70 percent in 2022E-2025E),” said the bank. “Sustainable top-line growth underpinned by population growth and appealing supply/demand dynamics.”
With an influx of cash coming from the $650 million sale of the Palms announced in May, Red Rock has the resources to firm its balance and perhaps buyback shares.
“Balance sheet will soon be under-levered, which we think will lead to incremental share repurchases,” according to JPMorgan.
Caesars Among Beloved Casino Stocks
Up 22.55 percent year-to-date, Caesars is one of Wall Street’s favorite gaming equities, a status that’s the result of the company’s delevering efforts and its swift iGaming and sports betting expansion.
JPMorgan says the Flamingo operator is experiencing strong leisure demand in Las Vegas and at its expansive portfolio of regional casinos. The bank also highlighted Caesars’ plans to sell some assets to reduce debt and its online casinos and sports betting business, which it now controls 100 percent of the economics of by way of the recently completed William Hill acquisition.
Caesars has “an emerging online sports betting and iCasino opportunity, of which CZR owns 100% (brand, tech, first skin) and should be able to grow via its sizable database and national footprint,” said the bank.
Other catalysts for Caesars include “incremental entertainment, banquet/food and beverage revenues ramping up” and the possibility of steadiness in the operator’s convention and meetings business.
Lots to Like with Boyd, Too
Over the course of the pandemic, Boyd Gaming is proving adept at expanding margins in both Sin City and regional markets, and analysts believe that trend is sustainable. Additionally, the operator has a compelling clientele mix.
“Attractive footprint in localized/regional drive-to markets and LV Locals (which has recovered quickly and we think has legs) focused on the leisure gaming customer,” notes JPMorgan.
Boyd’s sports betting exposure is often overlooked, but perhaps it shouldn’t be, because it owns five percent of FanDuel, the largest online sportsbook operator in the US.
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