Positive catalysts in place for BYD, PENN, PNK
CALL TO ACTION
State gaming regulators will start reporting May gaming results later this week. We expect sequentially improving trends with May’s regional gaming results and again in June (relative to Q1), which we believe will put a base under conservative Q2 regional casino estimates. Regional gaming stocks have not performed well as of late so the release of better monthly numbers and a strong Q2 earnings season (relative to current projections) could provide a nice bounce in these stocks.
Best May weather ever - sunny, blue skies and very few thunderstorms/tornados coupled with one extra Saturday provide a base for accelerating (less bad) regional results for May and June – and a potentially positive revision of estimates as the year develops.
State gaming regulators will begin to report May gaming results later this week. Our proprietary regional gaming model forecasts May 2014 same store gaming revenue declines of only -2% as compared to -5% in April and -7% in March. Insight into Missouri and Pennsylvania yields surprisingly decent May results.
Additionally, we call investor attention to the developing El Niño. If the El Niño fully develops this fall/winter (Nov thru Feb), the milder weather condition will provide lower energy bills against an easy and super brutal comp of last year's polar vortex and thus, provide consumers with increased discretionary spending power.
As we view regional gaming estimates, Q2 estimates should not be revised lower and could have an upside bias for BYD, PENN, and PNK.
WHAT WE THINK WE KNOW
A sneak peek into Missouri’s numbers tells us a flat to up slightly May YoY is in the cards – better than expected. We’re pretty sure PA will come in much better than previous months as well. These two months provide support for our thesis that May will show nice improvement from the rest of 2014.
Following an awful December, January and February on April 16th, we published a note “Regionals: April Flowers” then on May 14th we wrote “Regional Gaming: Trend Friend” wherein we noted we were hearing May was showing improvement from April (which improved from March). Today, we are again calling investors to action as we believe PENN and BYD are positioned to exceed company guidance as well as investor expectations.
As seen below, our early regional forecasting algorithm predicts May regional gaming revenues will decline 2%. If we are correct regarding the developing El Niño weather pattern, 3Q and 4Q results could surprise to the upside.
Bad demographics should continue to pressure regional gaming revenues. Younger generations are simply not interested in slot machines. We’ve written extensively about this secular headwind so we won’t rehash here. However, these volatile stocks can move significantly on data points – especially negative, reversal or contra-psychology inflections.
With confirmation from MO and PA, we’re pretty sure the May state releases beginning this week are going to look better. Investors should begin to feel more comfortable with Q2 estimates and possible upside which could catalyze the stocks. Over the near term, PENN looks to have the most upside given it has a beaten down stock price and overly conservative guidance.