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Posted on: July 12, 2023, 03:36h.
Last updated on: July 12, 2023, 03:36h.
Second-quarter earnings season kicked off this week and it’s just a matter of days before gaming companies step into the earnings confessional.
In aggregate, gaming equities lagged the S&P 500 in the first half of the year, but Churchill Downs (NASDAQ: CHDN) and MGM Resorts International (NYSE: MGM) could be among the industry’s winners in earnings season and beyond. That’s the take of Macquarie analyst Chad Beynon who highlighted that pair, among others, in a wide-ranging report to clients today.
As we look into 2H23E, we expect Gaming stock outperformance given stable fundamentals and discounted valuations,” wrote the analyst. “Historically, the sector has strong macro correlations, but fundamentals have recently outpaced inflation given overall wealth creation particularly with older age cohorts.”
Published earlier today, the June reading of the Consumer Price Index (CPI) showed an increase of just 0.2% on a month-over-month, less than economists expected. While rampant government spending forced inflation to multi-decade highs last year, it is cooling and that easing could be a plus for Las Vegas Strip and regional casino operators.
Churchill Downs: Regional Standout
While Churchill Downs has no Las Vegas Strip exposure and there are lingering concerns about the state of the US horse racing industry, the stock is a gaming favorite on Wall Street.
Beynon anointed the stock one of his top ideas for the second half, calling it a standout among regional gaming companies due to a robust pipeline and a projected three-year compound annual growth rate of 20%-plus. That’s the highest in the analyst’s coverage universe, excluding Macau casino equities.
In addition to ongoing ramping of assets that came online last year, other drivers of the Churchill Downs investment thesis include enhancements at its eponymous, storied Kentucky racetrack as well as historical horse racing machine (HRM) and regional casino expansion across multiple states.
“This well-diversified growth includes 1) Turn 1 experience; 2) DCG expansion/hotel; 3) LA HRMs in OTBs; and 4) DCG Downtown Louisville, in addition to ramping assets from 2022. In 2024, we expect $190m+ of additional project return EBITDA from 1) the Paddock project; 2) Queen of Terre Haute, 3) P2E growth (Dumfries, Rosie’s Emporia, other HRMs); and 4) Chaser’s (NH), as well as $35m from the Exacta Systems deal,” observed Beynon.
Vegas Vibes Strong for MGM
Up 40.35%, MGM is one of the gaming equities outpacing the broader market — out-performance driven in part by the resilient Las Vegas Strip as well as the Macau resurgence.
Beynon lauded the operator for “upmarket” moves in Sin City, including the acquisition of Cosmopolitan and the sale of the Mirage. Those transactions increase MGM’s leverage to luxury consumers that are often less vulnerable to economic downturns. The analyst added BetMGM is thriving and investors may not be fully appreciating the operator’s Macau exposure.
“For digital, we expect BetMGM to grow revenue ~35% in 2023 and continue to believe there are opportunities to solve for the 50/50 stake. With one of the strongest balance sheets, supportive shareholders, and a goal to be a global digital leader, we expect this opportunity to solve the stake issue to be a priority,” concluded the Beynon.
Translation: MGM owns just 50% of BetMGM with Entain controlling the other half, but the former now has the resources to potentially buy the latter out of that arrangement.
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