Casino investors look for the right bets from Macau to Las Vegas

The setup for the casino and gaming sector in 2023 is complicated with global macroeconomic pressures running up against a post-pandemic return of business travel, international travel, and expanding sports betting legalization. Investors will also face the challenge of threading the needle between high-growth plays and value picks.

U.S. region gaming: Earnings reports from Boyd Gaming (BYD) and Penn Entertainment (PENN) were strong enough to beat back some concerns on consumers pulling back on casino spending, even though there is still a cautious outlook for 2023. The readthrough was important because regional casinos have seen the first signs of distress historically even with revenue trends tending to prove more resilient in periods of recessions and consumer pullbacks. Morgan Stanley analyst Stephen Grambling noted regional brick-and-mortar GGR levels decelerated from 10% to 15% in Q4, which was above 2019 levels, toward high single digits. Macquarie analyst Chad Benyon forecasts a -2% decline in revenue for regional operators, with Q1 seen as being the strongest quarter due to an easier comparable from a year ago. The firm sees MGM Resorts (MGM), Bally's Interactive (BALY) and Monarch Casino & Resort (MCRI) as the most likely operators to top estimates. 

Las Vegas Strip: Casinos in Nevada saw gaming win increase 14% in December to more than $1.31B, according to an update from the Nevada Gaming Control Board. Las Vegas Strip casinos accounted for $814M of the monthly tally, which was up 25% from the level a year ago. An increase in group and convention business during the month and events like Raiders home football games, a college bowl game, the Pac 12 football championship, and a national rodeo event all helped bring extra traffic to Las Vegas in December. The big month for the Strip helped offset some weakness with downtown Las Vegas casinos (-6.9% Y/Y) and the Boulder Strip region (-8.0%). CBRE Equity Research analyst John DeCree said the Strip is now firing on all cylinders, with continued growth in gaming volumes, including signs of an early recovery in international play such as baccarat. The higher room pricing from a bounce in group and convention business is expected to accelerate even further. accelerates. The firm is bullish on the Strip FY23 outlook, particularly for Q1 due to soft comparables.

Macau: Gross gaming revenue in Macau soared 82.5% year-over-year in January to 11.6B patacas ($1.4B) to smash the consensus estimate for a 37% increase. The GGR tally was the highest since January of 2020, according to data from the Gaming Inspection and Coordination Bureau. The strong month was a result of the government ending most COVID-19 border restrictions on January 8, just in front of the Chinese New Year holiday. A general view is that casino operators with a higher exposure to the mass market will see stronger growth rates in 2023 than the VIP-heavy operators. "We think there is more room for recovery, particularly within Mass GGR in 2023 (when we think GGR can approximate 60% of 2019 levels) and improving further in 2024 (to 90% of 2019 levels)," noted J.P. Morgan analyst Joseph Greff. Overall, the firm sees Macau stocks as excellent plays on China reopening and singled out Las Vegas Sands (LVS), Wynn Resorts (WYNN) and Melco Resorts (MLCO) as top picks.

Online gaming/sports betting: Analysts have increased their estimates for the 2023 total addressable market for online sports betting and see iGaming and expect strong revenue and an improved win rate in existing states. Two of the bigger developments to watch is the DraftKings (DKNG) pursuit of profitability in the back of 2023 and the growth of BetMGM (MGM) (OTCPK:GMVHF). Deutsche Bank noted that a significant increase in the recreational player base and reduced levels of bonusing are likely to drive a slowdown in growth in gross gaming revenue, but increase growth in EBITDA margins and perhaps attract more investor attention. Meanwhile, Roth Capital reminded that Penn Entertainment (PENN) is just one of three iGaming operators - along with FanDuel (DUEL) and Caesars Entertainment (CZR) - to expect positive U.S./Canada EBITDA in 2023.

What to watch: The Super Bowl next weekend will throw another bright spotlight on the sports betting sector with record-smashing tallies expected for not only gaming win, but also hold rates - with profitable prop bets and parlays expected to be at a high mix of total bets.

 The list of top stocks by Seeking Alpha Quant Rating includes some under-the-radar picks like Sportradar (SRAD), Light & Wonder (LNW), and Evolution AB (OTCPK:EVVTY).

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