Bally’s Could Be Comeback Kid Among Gaming Equities

Bally’s (NYSE:BALY) stock was hot until it wasn’t. It’s still up 9.54 percent year-to-date, but it’s off 28.54 percent from its March highs.

Though mired in a slump, Bally’s remains one of Wall Street’s favored gaming ideas on the basis of margin expansion, acquisition integration, and sports betting, among other catalysts. In a note to clients today, Stifel analyst Jeffrey Stantial reiterates a “buy” rating on the stock, with a $75 price target. That implies upside of almost 42 percent from the Wednesday close.

Long-term margin expansion was also a key focus for investors during our meetings,” writes Stantial. “Most of our regional operator coverage posted meaningful margin expansion over 2019A levels during Q1, with management teams calling out a significant portion as sustainable. Management estimated they have been running closer to +500-600 basis points for their portfolio, while they estimate roughly half should prove sustainable even as operations normalize.”

Margin expansion, which is driven in large part by cost-cutting forced by the coronavirus pandemic, is a significant part of the thesis for regional gaming equities, including Bally’s.

Bally’s Stock Has Cards to Play

For investors, Bally’s is very much an expansion story. The company has morphed from nearly anonymous regional casino operator to a firm that’s made 11 acquisitions since the start of last year.

With Bally’s having an assortment of irons in the fire when it comes to pending acquisitions, some investors may be concerned about execution. But Stantial argues that’s not something to get carried away with.

“Management was extremely confident in their ability to pull these various pieces together, noting that each acquisition has brought the necessary labor force to support such inorganic growth (including software engineers and senior management on the online front),” said the Stifel analyst. “Given management’s strong track record on prior M&A, we see no reason to doubt them on this front.”

Because of the perceived execution risks, Bally’s land-based casino operations trade at a discount to peers, potentially providing investors with an opportunity to get involved with the stock, according to Stantial.

Sports Betting Outlook

Bally’s is making clear it wants to be a player on the business-to-business and consumer-facing sides of the sports wagering industry. However, its move into online sports betting has been slow, with the operator only recently rolling out its mobile app in a Colorado beta test.

The plan is to roll out in Indiana, Iowa, and New Jersey later this year. It may not be until the second half of 2022 before Wall Street gets a better read on Bally’s ability to generate revenue and garner market share in the sports betting space.

“While it is encouraging to see BALY get live with their product, we think it is too early to make any meaningful call on BALY’s relative performance, given the beta launch was accompanied by highly limited marketing spend,” said Stantial.