HEDGEYE EDGE
Soft January GGR trends were not the catalyst that the Regional Gaming stocks needed, but with better days on the horizon, we’re willing to look past the weather-impacted month. For starters, the January weather impacts were real with record low temperatures in key parts of the country. Additionally, following the drawdown in foot traffic and revenue trends in mid-January, there was evidence that data reverted towards YoY growth to end the month of January. More importantly, February trends have bounced back as well and seem to be getting back on track across the country. Given our views on February and expectations for March, we still believe Q1 GGR growth could narrowly accelerate vs Q4, which would set up Q2 to accelerate from Q1.
Sure, growth isn’t going gangbusters in the Regional markets, but outside of ’21, top line growth is rarely extraordinary in this industry. We’re focused on the rate of change in growth, and for Regionals, it should be headed in the right direction. As we await more confirmation of February trends, we continue to reiterate our bullish tilt towards Regional B&M operators. For more context on our idea rank order, see our latest position monitor HERE and read on for more of our direct insights on the Regional GGR backdrop heading into ’24.
REGIONAL GAMING REVENUE MODEL UPDATE
January same store regional GGR contracted 12.6% versus the prior year, ~450bps below our projection for the month. A big deceleration from the prior strength and momentum we saw in November through December. However, the entirety of the weakness was driven by weather-related losses across the mature markets. Even in pockets of the South, GGR was much softer than modeled. Indeed, January represents the first month of double-digit YoY declines since the Covid period. So, is it back to weakness / softness for the Regional Gaming industry moving forward? Recall, there was soft end to Q1’23, followed by a very challenging Q2 which prompted us to all but abandon the Regional stocks (BYD and PENN were moved to Neutral) and Q3 wasn’t much stronger, either. With these easier comps in mind, we expect GGR to accelerate meaningfully from this January hole. Fortunately for the Regionals, January is the seasonal lull in Q1, with February and March historically meaning more for GGR. So, assuming weather holds in, tax receipts come in higher YoY (they’re catching up now), and other factors, there’s growth on the horizon.
November and December beat with January working against the trend, but considering the sequential structure of our model, the beat Q4 and the snap back we’re now seeing in February to date, have our model still pointing toward growth in ‘24. February and March should be growth months, with some give and take between the end of March and April due to the Easter shift. We have contemplated all these shifts along with historical seasonal trends in our forward model.
Following the drawdown in January, we’re still projecting full year ’24 same-store regional GGR to grow ~1-2% YoY, albeit slightly less growth than our prior installment. Yes, it’s early in the year, and yes, there will be revisions as more data feeds into the model, but the path forward should, at minimum, begin to support current estimates and potentially set up modest beats in the coming quarters. To us, this continues to justify our mid-January positive bias shift toward the Regional Gaming stocks.
GAMING STOCK CONCLUSIONS
We’re not quite there on recommending BYD, CZR, or PENN as top ideas, but we’re getting close, especially on BYD. January is a blemish on the record, but the outlook from here is much improved relative to the protracted malaise experienced over the past year. Recall, last year we pivoted away twice (see HERE and HERE) from Regional Gaming toward Las Vegas and Online as we were less enthusiastic about the revenue backdrop. That view has changed, and at the same time, our views of Regional Gaming EBITDAR and cash flows being undervalued never really faltered. This is a stable business with better balance sheets and cash flows than pre-Covid, and the long-term demographic bear case is no longer viable.
ABOUT THE REGIONAL GGR MODEL
We’re running the analysis exclusive of sports betting (SB) and iCasino (iC) 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. The model is generally agnostic to macro trends but does feature inputs tied to calendar shifts and calendar composition vs the prior year.
