In a recent investor note, Truist Securities analyst Barry Jonas expressed a cautious outlook on gaming-related stocks, describing them as underperforming against a resilient Standard & Poor’s Index. His comments, shared on October 23, highlight ongoing challenges within the gaming sector, despite some positive indicators.
Current Market Sentiment and Stock Performance
Jonas noted that while fears of a significant downturn in the gaming industry have subsided, investor sentiment remains subdued, reflecting a broader consumer malaise. He pointed out that the fundamentals of the gaming group are steady but “uninspiring,” leading him to lower estimates for land-based casinos and predict flat results for the tech sector and real estate investment trusts (REITs).
- Key observations from Jonas include:
- Local and regional casino operators are struggling to maintain flat performance.
- Las Vegas Strip operators are contending with narratives suggesting that the market has peaked.
- Interest rates could influence a wave of mergers and acquisitions in 2025, following a tech-heavy M&A year in 2024.
Jonas identified Golden Entertainment as a potential seller of assets, while Churchill Downs is seen as a likely buyer. Caesars Entertainment may consider spinning off properties to reduce leverage.
Bright Spots and Growth Potential
Despite the overall cautious outlook, Jonas highlighted growth in the digital sector, particularly led by DraftKings. However, he acknowledged that his expectations for growth in ESPN Bet have yet to materialize. The tech sector remains volatile, with Light & Wonder being viewed as a good value following its recent setbacks.
- Price target adjustments made by Jonas include:
- Upward revisions:
- Boyd Gaming: $75 to $77
- Monarch Casino Resorts: $75 to $82
- Everi Holdings: $10 to $14.25
- Downward revisions:
- Penn Entertainment: $25 to $23
- Station Casinos: $63 to $58
- MGM Resorts: $58 to $56
- Golden Entertainment: $38 to $36
- Light & Wonder: $120 to $115
- Upward revisions:
The recent interest rate reduction by the Federal Reserve is seen as a potential catalyst for increased M&A activity within the gaming sector. Companies like Vici Properties, Gaming & Leisure Properties, and Caesars are expected to benefit from this environment.
Future Outlook and Regional Performance
Looking ahead, Jonas anticipates that M&A activity will pick up following the November 5 election, as political uncertainty often leads consumers to be more cautious with their spending. He explained that gaming REITs are always on the lookout for accretive sale-leasebacks, and operators may seek to right-size valuations or drive growth through synergies.
- Notable points regarding the Las Vegas market include:
- Softness on the Strip is attributed more to challenging year-over-year comparisons than to structural weaknesses.
- Gambling and baccarat revenue have shown year-to-date increases, despite monthly fluctuations.
Jonas expressed some concerns about the fourth quarter, particularly regarding the upcoming F1 race, which is reportedly tracking behind on bookings. Caesars has also raised concerns about online room bookings, which could impact MGM.
Regional Insights and Company Performance
Regionally, casinos have only seen incremental growth compared to 2023, with a cooling-off in merger discussions following speculation about a potential Boyd takeover of Penn. Caesars is focusing on maximizing margins while managing ongoing softness in the market.
- Positive developments for Caesars include:
- New properties in Nebraska, Oklahoma, and Virginia.
- Revamped operations at Caesars New Orleans, which are experiencing high demand due to events like Taylor Swift concerts.
Jonas remains optimistic about Churchill Downs, citing its unique growth opportunities from new projects in Virginia and Kentucky, as well as improvements at its Louisville racetrack.