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Looking ahead to the second half of 2018, gaming companies are poised to make a sharp move to the upside. The recent Supreme Court decision legalizing sports gambling should be a strong catalyst for short-term growth, as gaming companies are shortly expected to announce their strategies for tapping into the estimated $150+ billion-dollar sports gaming market.
Industry experts seem to agree. Bank of America Merrill Lynch analyst Shaun Kelly sent a note to clients earlier this week explaining that "[w]e expect operator margins to be low but see upside for all of regional gaming, while gaming tech could be a key beneficiary." He predicts the industry's gross gaming revenue from sports betting could rise to $5 billion to $10 billion in five years versus the $200 million current size today.
“The recent Supreme Court decision is a strong positive for the online gaming industry,” explains Georgy Xop, creator of PrimeBall.io an independent, fully-automated, blockchain-based global lottery platform, “we see legalization as a catalyst for the entire marketplace, with clear rules and regulations, enhanced customer protections, greater efficiency and transparency all building trust and investor confidence.”
We believe MGM Resorts International (NYSE: MGM), Caesars Entertainment Corporation (NYSE: CZR), Boyd Gaming (NYSE: BYD), and Penn National Gaming (NASDAQ: PENN) are best positioned for short-term appreciation.
MGM Resorts International (NYSE: MGM)
MGM offers gaming, hotel, convention, dining, entertainment, retail, and other resort amenities across 14 resorts in the United States. MGM is currently trading at $31.73, down 4.97% year to date. MGM delivered mixed results for the first quarter 2018, reporting $2.1 billion revenue from its US operations, a one percent decline from the previous year. Lingering impact from the deadly shooting at the Mandalay Bay and a cancelled heavyweight championship fight contributed to the weak performance.
Although there is some concern about the amount of debt MGM is carrying, MGM had not offered a divided for several years until reinstating in 2017, which is a sign of confidence in their financial position. It is also encouraging that MGM increased its annual dividend by 9 percent and agreed to repurchase 10 million shares in the first quarter, remaining on track for its larger buyback plan. MGM is also the unintentional beneficiary of the management turmoil at competitor Wynn Resorts which should be helpful in the near-term.
The 18 analysts offering 12-month price forecasts for MGM Resorts International have a median target of $38.50, with a high estimate of $43 and a low estimate of $34.
Following the Supreme Court decision, MGM CEO Jim Murren told CNBC’s Power Lunch: "We have already established the architecture to deploy sports betting as soon as the states allow us to do that."
Caesars Entertainment Corporation (NYSE: CZR)
Caesars Entertainment owns and operates 47 casinos across 13 states. Caesars is currently trading at $12.70, up fractionally since the beginning of the year. Caesars first quarter net revenue increased $1 billion, from $966 million to $1.97 billion. Adjusted EBITDAR improved $243 million, from $275 million to $518 million. Caesars recently announced a new $500 million share repurchase authorization which should benefit shareholders.
The 6 analysts offering 12-month price forecasts for Caesars have a median target of $15.75, with a high estimate of $17 and a low estimate of $14.
Caesars emerged from bankruptcy in 2017 with a stronger balance sheet and looks to be undervalued relative to its peers. Las Vegas, where Caesars has very strong assets, is a growing city and all signs indicate the worst of the recession, which hit Las Vegas particularly hard, is a distant memory. Nationally, lower taxes, near-full employment and a strong economy are good for gaming companies generally, and as one of the largest casino operators in the United States, Caesars is in a stronger position now than ever before. Lastly, like MGM, Wynn Resorts' problems are good for Caesars in the short-term.
When asked about the potential impact of sports gambling legalization, CEO Mark Frissora said, “Caesars is a leader in legalized gaming in the U.S. As a result, we expect to be able to provide safe, exciting sports wagering experiences to consumers across the country as we do today in Nevada. We plan to announce our specific approach to this business as we better understand the opportunities and regulations which evolve from today’s Supreme Court decision.”
Boyd Gaming (NYSE: BYD)
Boyd Gaming Corporation, together with its subsidiaries, operates as a multi-jurisdictional gaming company owning and operating 24 gaming entertainment properties in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana, and Mississippi. Boyd is currently trading at $36.16, up over 3% since the start of the year. Boyd Gaming reported first-quarter net revenues of $606.1 million, compared to $610.1 million in the first quarter of 2017. The Company reported net income of $41.4 million, or $0.36 per share, for the first quarter of 2018, compared to $35.5 million, or $0.31 per share, for the year-ago period, so it is showing some solid growth.
The 13 analysts offering 12-month price forecasts for Boyd Gaming Corp have a median target of $40, with a high estimate of $44 and a low estimate of $32.
While most investors thinking about gaming look to Las Vegas, and to some extent Atlantic City, regional operators like Boyd Gaming has been quietly pursuing geographic diversification as a winning strategy. Especially in light of the recent court decision, a strong geographic footprint where there is less competition is going to be especially valuable. With operations spread across several states, Boyd can sidestep regional economic, weather and even political/regulatory issues that affect other gaming companies. We also like the news that Boyd is entering the Philadelphia metro market with its purchase of Valley Forge Casino Resort for $280.5 million, and it expects the acquisition to be free cash flow positive and immediately accretive to earnings. This acquisition should be good news for the stock in 2018.
Boyd Gaming CEO Keith Smith had the following to say regarding his company’s plans to offer sports gambling, “Boyd Gaming is excited by today’s Supreme Court decision and views the expansion of sports betting as a growth opportunity for our company. Whether we ultimately offer sports betting in specific states will depend on the rules and tax rates set forth by each state."
Penn National Gaming (NASDAQ: PENN)
Penn National Gaming, Inc. owns and manages gaming and racing facilities, and operates video gaming terminals with a focus on slot machine entertainment. Penn National operates 27 facilities in 17 jurisdictions, including California, Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia, and Ontario.
Penn National is currently trading at $33.98 and has the strongest year to date performance (+8.46%) among the stocks discussed in this article. Penn National first quarter results exceeded guidance, with record income from operations of $172+ million. All three operating segments generated year over year growth and the company recently increased its full year guidance.
In December 2017, Penn National announced plans to acquire Pinnacle Entertainment in a cash and stock transaction valued at approximately $2.8 billion. After the deal, Penn National will operate a combined 41 properties and will be the largest regional gaming company in the United States.
The closing of the transaction is expected to occur in the second half of 2018 and should give Penn National significantly greater operational scale and geographic diversity, benefiting like Boyd, from a favorable local tax climate, limited local competition and a momentum favoring gaming generally.
The 12 analysts offering 12-month price forecasts for Penn National Gaming Inc have a median target of $35.50, with a high estimate of $40 and a low estimate of $30.
In response to the prospect of legalization of sports gambling, Penn National CEO said in February, “the big advantage for us is the increased visitation that we’ll see by having sportsbook operations at our regional properties where we can take advantage of that visitation with higher room rates, higher volumes of food and beverage revenues.”
Casino operators, sports data services and technology companies servicing the gaming industry are in the best position to outperform the broader market with the move toward legalized gambling.
Among the publicly-traded casino operators, MGM Resorts International, Caesars Entertainment Corporation, Boyd Gaming, and Penn National Gaming have the strongest geographic footprint beyond Las Vegas, diverse resort-style offerings to complement gaming and benefit from increased visitation, especially around major sporting events and should see the most direct benefit from the move toward legalization.
We believe investors should take action now, while there is still a measure of favorable uncertainty before the states announce specific plans to allow sports gambling in their jurisdictions or the companies publicly detail their broader sports gaming strategy, to initiate or increase positions in these four companies.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.