HEDGEYE EDGE
We see little evidence of a top line slowdown in the regional markets in November despite some consternation in the investment community. Some analysts appear bearish on November and we believe some of that relates to an overreliance on Missouri “daily” revenue tallies which have proven unreliable. On the other hand, our channel checks suggest consistent trends to start out November and following a solid October, that puts Q4 in the beat column. Of course, with Covid spreading, we’re cognizant of the risk of further casino closures or restrictions. However, we would view any impact as temporary and only affecting Q4 and possible January. There’s a lot of cushion in our numbers, however, versus the Street for 2021 and 2022 and we see forward Street estimates heading higher around earnings season. We remain bullish on the regional gamers with BYD and RRR topping our list due to earnings upside and low valuations, while we remain positively biased toward PENN.
october | in the books and solid
Mostly through the data accumulation phase for October regional gaming and revenues look very consistent with the Q3 exit rate and maybe even a bit stronger. October did benefit from 2 more weekend days on a YoY basis, but rising Covid cases + restrictions on hours of operation and capacity likely proved to be somewhat of an offsetting factor. Still, even with admittedly more headwinds in the quarter, 7 out of the 12 states to report in our sample so far have shown accelerating casino revenue growth vs September (IA, MO, OH, WV, PA, LA, and IL), while the remaining 5 only showed modest deceleration. Note, in the slide below we only highlight core casino revenues and exclude the positive impact of iGaming or Sports Betting (SB) where applicable. But it is worth noting that in states like IN, IA, and PA, SB revenues soared in the month of October posting growth of 83%, 56%, and 146% YoY, respectively. In other words, other gaming revenue drivers are really kicking into gear as well, making the start to Q4 even more positive than the headline figures perhaps suggest.
november | misleading data vs reality
Of course, one month doesn’t typically make a quarter and investors could be anxious for a number of reasons: fewer weekend days in November, rising Covid infection rates across most of the country (potential capacity restrictions), casino closures, election jitters impacting consumer spending, the stimulus legislative deadlock, etc. Just like in September and October, there’s plenty of things to be concerned with, but growth has remained resilient in the face of these concerns.
Admittedly, the rise in Covid infection rates and cases across much of the US, particularly the Midwest is cause for concern and we have reflected that in our near term estimates (see below), but so far, the positives outweigh the negatives for much of regional gaming. IL and MI have been the only states to shutter casinos, but both states now have growing online sports betting options which could serve as an offsetting factor, and in the meantime for those states facing an uphill battle with casino closures, states like PA and NJ are providing top line relief in the form of surging iGaming revenues.
Potential misleading “alternative data” – core business looks consistent so far in NOV
Over the past week we had heard from a few clients that some analysts have cited suggested a weakening trend in regional casino foot traffic and revenues in November, and allegedly the drop off was noticeable vs October trends. We expected the first week of November to be impacted due to the election and potentially rising Covid cases, but not a major sea change in activity. Following a review of our own tracking data and the usual channel checks, we believe trends remain consistent with the last few months – so no slowdown whatsoever. The casino closure in states like MI and IL are new and offer risks, but those risks should be temporary and likely will benefit properties in nearby OH and IN, or simply result in pent up demand and strong revenue performance upon reopening (as we have consistently seen so far).
Also, in the recovery to date, foot traffic remains down but spend and win per visitor is up big YoY and sports betting momentum and adoption continues to tick higher. We’re not knocking the usage of alternative data to get an edge; certainly we have our share of tools we like to use, but when it comes to tracking regional gaming trends we have often found alternative data to be very erratic and not always representative of trends. While the alternative data tracking cited by some of our peers may prove to be correct in a few months, the reports we’re getting out of the industry suggest that so far, they are not correct.
Rely on Missouri MTD data at your own peril
One dataset that analysts may be (overly)relying on is the “up to the minute” gaming stats published by the Missouri Gaming Commission. The data provides a running YTD record of gaming revenues for the given calendar year, but the problem is that these figures are often way out of whack when comparing the implied GGR / day pace that ultimately gets reported for the month. In the case of November, our last check of the “up to the minute” stats suggested GGR pace might be tracking down 15-20% vs prior year pace, which would be a huge step down vs what we have seen from Missouri over the last few months (-10% to -5% YoY growth). However, that implied run rate of GGR is rather misleading and we took some random screenshots from the YTD to provide some context around those figures. As shown below, the tracking error pertaining to what is implied as the month to date GGR pace vs what is ultimately reported shows a very wide range of outcomes, with a bias towards underrepresenting a given month’s GGR pace. As such, we would not put too much stock in the November to date figures from MO, as there are clearly lags and errors that impact the tallies.
November MTD data looks consistent; Covid restrictions will impact some states
NY, WV, and MD (on occasion) also provide weekly and MTD updates on GGR, so we routinely peek at what the data is implying as well as MO. Through the first two week of November, NY slot revenue data has been tracking quite consistent with October (down low double digits YoY), although there are more restrictions implemented. In WV, the latest scan of the weekly data showed slots and tables tracking down ~20% for the first week of Nov despite the impact of the election. Net-net, these trends are appeared to be consistent with recent months and are showing no signs of “stress” in the system for those states that are currently “open.”
Those states that are currently closed will clearly impact Q4 results for the regional gaming companies, particularly PENN. Additionally, states that are watching their Covid cases rise (IN, OH, and PA) are certainly at risk of further government forced capacity restrictions but remain open for now. We’re keeping close tabs on the state by state commentary, but also remain confident that our 2021 and 2022 numbers are unlikely to be affected by near term setbacks.
CONCLUSION | LONG BYD & RRR; positive bias on penn
We took into account the Michigan and Illinois temporary closures as well as reduced capacity elsewhere as a result of Covid related state government actions. Still, we remain solidly above the Street for Q4 EBITDA for PENN and BYD. Although the performance of the Las Vegas Locals market was not discussed in this note, we believe top line and margin trends remain consistent; that is, above the Street and so is our Q4 EBITDA estimate for RRR. Moreover, for all three companies, we remain well ahead of the Street for 2021 and 2022 as can be seen in the following chart. Certainly, further government action in other states due to Covid could present risk to these numbers, we believe that risk is primarily contained to Q4.
