HEDGEYE EDGE
We’re still awaiting catalysts to emerge as valuations look low for what has proved to be a very good business. Easier comps might drive an improvement from negative growth to more flattish but that’s hardly a major catalyst in our opinion. Q3 earnings were mostly misses as margin pressure seems to have escalated and created an additional dose of uncertainty over the near term. Nevertheless, balance sheets and free cash flow production remain strong, demand remains fairly resilient, and valuations look cheap. For now, a neutral posture seems appropriate.
BYD and PENN reside in our Neutral bucket while we remain a little more positive on RRR although only to the level of Positive / Long Bias.
REGIONAL GAMING REVENUE MODEL UPDATE
Finalized September same store regional GGR grew 9.1% versus the same month in 2019, ~100bps above our lowered projection for the month. Relative to the prior year, growth was again negative, down ~2% YoY, slightly better than August. A soft end to Q1 and then a challenged Q2 forced us to lower most of the year and following a choppy reported Q3, and read into October, we’re not feeling much optimism for the back half. So GGR growth remains negative versus last year, and at this point, the potential for trends to look “less bad” against easy comps is as close a positive catalyst as there is. That’s not much of a bull case and the stability theme doesn’t seem to be much of a catalyst to us right now. It’s likely that April / May will prove to have been the bottom at -4% to -5% YoY, but GGR being down 2% doesn’t and likely won’t instill much confidence.
Considering the sequential structure of our model, the beat in September does get carried through to the balance of the year, however, given the miss in August there’s somewhat of a wash in terms of driving a material adjustment to the full year. For the full year ’23, we’re now projecting same-store regional GGR to decline a touch more than 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 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.
