HEDGEYE EDGE
Final July numbers and the early August read suggest a still sluggish environment in regional gaming markets. GGR grew 10% from July 2019, above our projection, but fell 2% YoY. July’s decline was worse than June but regional GGR growth should improve sequentially starting in August. Acceleration is good but 2H ’23 GGR should still fall short of last year. We remain cautious on the regional gaming stocks as they lack catalysts. Down GGR growth is not cutting it for us right now.
BYD and PENN reside in our Neutral bucket while we remain a little more positive on RRR although only to the level of Positive Bias.
REGIONAL GAMING REVENUE MODEL UPDATE
Finalized July same store regional GGR grew 9.9% versus the same month in 2019, ~210bps above our lowered projection for the month. So, a “beat” but similar to May and June, but not enough for us to significantly raise forward expectations. A soft end to Q1 and the April punt had us lower most of the year, so we’ll need to see a lot more upside before we get too excited. On a YoY basis, July growth decelerated to -2.0% from June’s -1.2% performance. So GGR growth remains negative versus last year but the good news is that monthly trends should be “less bad” going forward. It’s likely that April / May will prove to have been the bottom at -4% to -5% YoY.
Considering the sequential structure of our model, the beat on July does get carried through to the balance of the year, however, the consecutive misses and softness in Q2 remain an offset to the stronger July. On the bright side – if there is one at all – our tracking data for August suggests that trends did not weaken further on a seasonally and calendar adjusted basis into the month, so we have further confirmation that the rate of change should be improving into 2H.
For the full year ’23, we’re still projecting same-store regional GGR to decline ~1% YoY relative to our initial start-of-year expectation of +1% YoY growth. Given the growth comparison set up and the more favorable YoY calendar in 2H’23, the optics around growth trends should improve, but not likely enough to spur positive estimate revisions or a sentiment reversal. To us, this justifies our more neutral posture on the stocks.
GAMING STOCK CONCLUSIONS
As expressed earlier this year as we pivoted away (twice; see HERE and HERE) from regional gaming and more toward Las Vegas and, more recently Macau, we’re less enthusiastic about the revenue backdrop for the regional markets. We still believe regional gaming EBITDAR and cash flows are undervalued (there’s more stability, balance sheets are clean, demographics better, etc.), but these stocks require positive catalysts to work and without a better revenue backdrop we just don’t see one right now for the group.
ABOUT THE REGIONAL GGR MODEL
We’re running the analysis exclusive of sports betting (SB) and iGaming (iG) given that they’re not universally offered across all the states observed in the analysis. Either way, given the much lower incremental margin on retail SB revenues, the real EBITDA upside would be derived from B&M slots and tables. Additionally, if there is an extra pick up (or setback) in slots or table trends, our model would capture it and those trends would be carried forward in our estimates.
