Casino Profits May Facilitate Equity Performance

February 2, 2023 World Earnings & Filings

Gaming shares struggled in 2022 due in part to analysts lowering 2023 predictions due to a potentially gloomy economic outlook. However, the season of casino results may offer pleasantly unexpected positive outlooks for this year from operators.

Only Las Vegas Sands (NYSE: LVS) has so far released fourth-quarter financial information. Bullish commentary on the Macau resurgence and continued success in Singapore are among the causes driving an ongoing increase in shares of the Venetian Macau operator, despite the business not providing detailed 2023 estimates. Some experts predict gaming equities will perform better than expected in 2023 due to the influx of casino earnings announcements expected over the next few weeks.

In a letter to clients on Monday, B. Riley analyst David Bain stated, “Estimate changes also left 2023 gaming estimates capturing anticipated softening of demand, in our view. We believe the combination presents a setting for ongoing, broad-based 2023 gaming stock outperformance.”

The analyst identifies names from Macau and operators on the Las Vegas Strip as catalysts.

Earnings from casinos may show a “Valuation Degradation”
Due to concerns like ongoing inflation, rising interest rates, and the potential for a significant recession this year, analysts reduced their projections for casino earnings for 2023 last year.

According to Bain, the roughly 15% reduction in earnings before interest, taxes, depreciation, and amortization (EBITDA) expectations that many gaming stocks had to deal with was too severe and may have created possibilities for growth.

For example, the typical regional casino/Las Vegas casino projection predicts a 7%/2% Y/Y reduction in EBITDA. A 15% EBITDA decrease from current forecasts, the majority of which were previously lowered throughout 2022, is too harsh, giving multiple stock buying opportunities, in our opinion, even though there is an argument for some GGR and margin compression in a weaker macro environment.

Simply put, a scenario of “value degradation” may be at work among casino companies, and the group’s earnings season may highlight those discrepancies, possibly leading more investors to reconsider gaming equities.

Better Casino Earnings May Be Driven by Macau and Las Vegas
Some analysts were afraid that a weakening macroeconomic climate would hurt Las Vegas casino profitability at the beginning of this year. However, the return of tourists from abroad and the strong lineup of events in 2023 may protect Strip operators from a drop in EBITDA.

The 1Q23 CES attendance (against the Omicron comp), 1Q23 CONEXPO-CON/AGG, 1Q23 West Regional NCAA tournament at the TMobile arena, 4Q23 multi-billion MSG Sphere opening, 4Q23 inclusion of Formula 1 Las Vegas Grand Prix, and 1Q24E Super Bowl at Allegiant Stadium are some of the visitation drivers, according to Bain. The Strip also continues to have limited new supply, including Fontainebleau.

Although Macau stocks normally trade at higher valuations than their US gaming equivalents, the B. Riley analyst notes that there are some considerations to keep in mind with the suddenly hot equities linked to the Asia-Pacific casino center.

According to Bain, “newer, longer-term Macau valuation concerns include:

China leadership decision-making (acute) volatility
Shorter concessions with new capex requirements potentially cutting into overall ROIs
Uneven VIP to premium mass player conversion
Potential US/China decoupling.”