Several well-known gaming companies are among the consumer discretionary names favored by Wells Fargo, as the bank upgrades the sector, citing an unusual consumer strength.
In a note out today, the bank lifts the consumer cyclical sector to “overweight” from “neutral,” noting it hasn’t seen companies emerge from a prior recession as strong as they are coming out of the coronavirus economic lull.
We are upgrading the Consumer Services industry group to Overweight from Neutral based on: (1) the strong near-term outlook for personal consumption expenditures, which should spur a sharp EPS recovery; (2) our preference for high ‘Covid Beta’ and China exposure; and (3) oversold technicals (relative underperformance),” said the bank.
In its bull call on consumer discretionary names, Wells Fargo highlights the familiar issues of increasing COVID-19 vaccinations and pent-up demand as positive catalysts for shares of casino, hotel, and restaurant operators.
Favoring China Exposure
Wells Fargo is also positive on consumer services names with exposure to China, a box checked with gaming giants Las Vegas Sands (NYSE:LVS), MGM Resorts International (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN).
Combined, those companies operate nine integrated resorts in the special administrative region (SAR) of Macau. In the cases of LVS and Wynn, those firms rely on the world’s largest casino center for two-thirds or more of earnings before interest, taxes, depreciation and amortization (EBITDA) in any given quarter in a normal operating environment.
Macau equities have long been favored by Wall Street over gaming names with heavier Las Vegas exposure, based on the notion that pent-up demand will facilitate a more rapid rebound in the Chinese territory. Signs of that resurgence are emerging, as operators such as LVS and Wynn reported improving EBITDA figures for the final three months of 2020.
Still, visitation to the SAR remains slack. Officials there are moving to ameliorate that situation and are actively working with Beijing to improve approval times for Individual Visit Scheme (IVS) scheme visas. The goal is to allow tourists to file IVS requests online. Currently, they must request those permits in person, and approval times span up to two weeks.
Wells Fargo MGM Mention Is Encouraging
For investors, staff, tourists, and Las Vegas alike, MGM making the cut as one of Wells Fargo’s favored gaming ideas is encouraging for multiple reasons.
The Bellagio operator has the largest footprint on the Strip, and the US gaming mecca accounts for roughly half its EBITDA.
Sin City is highly levered to the themes of consumer strength, increased vaccinations, and pent-up demand. While plenty of work remains to get conventions back to Las Vegas and live entertainment up and running again, MGM took a significant step in the right direction last week, saying that effective March 3, the hotels at Mandalay Bay, The Mirage, and Park MGM will be open seven days a week, 24/7.
MGM and Wynn are both up more than six percent on the Wells Fargo comments, while shares of LVS are higher by more than five percent. The Mirage operator is the best-performing member of the trio since the start of 2021, with a year-to-date gain of 15.58 percent.
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