Posted on: March 27, 2023, 03:10h.
Last updated on: March 27, 2023, 03:10h.
Entering 2023, consensus held that the toxic combination of stubbornly high inflation and rising interest rates would eventually sap consumer discretionary spending, including gaming-related expenditures.
Caesars Entertainment (NASDAQ: CZR) and Century Casinos (NASDAQ: CNTY) are among the casino operators proving consumer demand for gaming remains sturdy in the first quarter despite the aforementioned macroeconomic challenges. That’s the take of Macquarie analyst Chad Beynon who, in a note titled “Looking for Weakness in All the Wrong Places,” discusses some of the key takeaways from the firm’s recent Consumer Bright Ideas Conference.
Those include ongoing earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue strength on the Las Vegas Strip. Broadly speaking Nevada casinos are on a nearly two-year run of posting at least $1 billion a month in gross gaming revenue (GGR).
With an improving events and convention calendar, room rates and overall revenue/EBITDA contribution appear to be very healthy in early 1Q, with additional catalysts appearing to fill the city. While 2Q presents tough year-over-year comps, we are confident in our 2023E estimates, particularly in 2H with additional events,” wrote Beynon.
As the second-largest operator on the Las Vegas Strip and one of the dominant casino names in the Reno-Lake Tahoe and Laughlin markets, Caesars is highly levered to Nevada gaming vibrancy.
Hail Caesar, Century Deserves Love, Too
While Caesars is often associated with Las Vegas, it also has one of the deepest portfolios of regional gaming destinations in the business. That could be a plus for investors going forward.
“Across Regional, CZR also stands to benefit from multiple growth projects, which we think should drive growth even if macro turns softer,” added Beynon. “This includes the ramping of Lake Charles land-based transition (December 2022), the Danville, VA temporary opening (3Q23), the Columbus, Neb. opening in mid-2024, Harrah’s Hoosier Park expansion (3Q23), the ramping of Pompano, New Orleans renovations and expansion (2024), and Atlantic City capex (highsingle-digit to 10% return). As these projects come online, management expects capex will step down from ~$800m to maintenance levels of ~$400m.”
As for Century Casinos, that small-cap regional operator recently won regulatory approval for its $195 million purchase of the Nugget Sparks, marking its initial entry into Nevada. That coupled with a pending purchase in Maryland could drive long-term EBITDA upside. With Century having a penchant for shrewd deal-making, it’s possible the operator explores more mergers and acquisitions opportunities, including those in Las Vegas.
“The company is continuing to explore M&A inside the US, with very small markets and Atlantic City the only places they will not look to acquire,” observed Beynon. “Management likes the thought of acquiring, not building assets given recent successful transactions. It expressed possible interest in a Vegas asset at the right price, and believes there would be real synergies with its regional assets (including Reno – 80k in the database).”
Betting on Bally’s, Too
Bally’s (NYSE: BALY), which is off 40.42% over the past year, could be a casino equity redemption story, according to Macquarie. That case is bolstered by the upcoming debut of the operator’s temporary gaming venue in Chicago, which will later give way to a permanent venue — the operator’s most expensive to date.
While some market participants fret about the $1.7 billion price tag associated with Bally’s Chicago project, Beynon says the operator has avenues to raise capital and growth levers.
“Management noted that it has several ways to fund the project including a combination of debt, equity, cash on hand, and from proceeds of a sale-leaseback with Lincoln. Positively, Atlantic City is trending in the right direction, with hold back on track and the business inflecting EBITDA-positive in February. We think this is particularly encouragingly given that it is the offseason for Atlantic City, and thus should provide a boost for 2023 profitability,” concluded the analyst.