HEDGEYE EDGE
The solid finish to ’23 was derailed by weaker January and 1H February GGR trends, but since then, we believe the Regional Gaming industry has been on solid footing which could lead to a reversal of sentiment in the coming months. With better days on the horizon, we’re more than willing to look past the just “ok” Q1 results, especially in the context of decent growth and overall acceleration through the quarter. A common pushback to our more optimistic view of the Regional space is that there are stocks and categories with better growth prospects for the year ahead. We see that argument, but the potential for inflection in both top line trends and EBITDA growth, should in due time, really get these stocks working. March did accelerate from February, and we see growth coming for April despite the more challenging calendar YoY.
BYD remains our top Regional Gaming idea and is closely tied to these developing trends. For more perspective, read on and see our recent deep dive deck – HERE.
NEAR TERM FACTORS
Q1 was never going to be the big growth catalyst for the industry (that’s coming in Q2-Q3), but there’s reason to believe that the Q1 exit rate (adj. for Easter) and April should be the start of the future YoY growth trend. MTD tracking in important states as well the cadence of tax refunds (accelerating in March & April) suggests trends should continue higher. Again, it’s not a quick return to MSD growth, but there will be acceleration. Some nearer term dynamics warrant some added optimism relative to the depressed sentiment out there.
REGIONAL GAMING REVENUE MODEL UPDATE
March same store regional GGR grew 2.1% versus the prior year, ~150bps below our projection for the month. Nevertheless, the gap between our projection model (still anchoring off late Q4 trend) and actual revenue growth is starting to close. In addition to "closing the gap" to our model, the industry also experienced a nice acceleration from the prior month and overall weather-induced weakness from earlier this year. Importantly, there were pockets of very solid YoY growth in key markets across the Midwest and Louisiana grew YoY as well. Much like February, we’re not expecting investors will get overly optimistic about growth trends when the industry barely grew YoY despite having an added day in the quarter. However, investors should remember that the comp is still difficult YoY and there were material headwinds in the quarter. If trends hold through the easier comps in Q2, we expect sentiment to turn for the better.
So, assuming weather holds in, tax receipts come in higher YoY (they’ve caught up a bunch), and other factors hold, there’s growth on the horizon. April will have an easier comp as the Easter headwind is removed, which could make the combined March-April period more of a wash. We have contemplated all these shifts along with historical seasonal trends in our forward model.
Following the YTD results, we’re still projecting full year ’24 same-store regional GGR to grow ~1-2% YoY. 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 added BYD to our Best Ideas list last month – predicated on our deep dive analysis of the company and the industry (see HERE). The perception around Q1’24 is a blemish on the near term record, but the outlook from here is much improved relative to the protracted malaise experienced over the past year. Building off the improved growth backdrop, we also expect Q1 earnings season to be decent catalyst for the group of stocks as GGR trends likely came in above lowered expectations which should give way for some modest upside to EBITDA. To us, BYD looks the best going into earnings and continues to be one of the better risk / reward plays in the Gaming space.
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.
