Casino Stock Winners Have Free Cash Flow, Online Exposure

Posted on: September 4, 2022, 03:00h. 

Last updated on: September 4, 2022, 07:55h.

Casino stocks are incurring plenty of punishment this year, but some analysts see opportunity in the group. That’s particularly among digital gaming names, as well as those generating ample amounts of free cash flow.

casino stocks
Tourists on the Las Vegas Strip. An analyst says casino stocks with strong free cash flow could be winners. (Image: Bloomberg)

While gross gaming revenue (GGR) at regional casinos ticked lower in July on a year-over-year basis, the data point improved month-over-month, indicating demand trends remain solid at land-based gaming venues. Still, analysts advise investors to be selective when it comes to casino equities.

Given healthy underlying trends, we are most positive on names with strong underlying FCF, an online gaming growth strategy and prefer lower leverage,” wrote Macquarie analyst Chad Beynon in a note out last Friday.

Amid soaring interest rates and signs the US economy is slowing, financial markets are displaying distaste for debt-laden companies – regardless of industry — favoring those with clean balance or firms taking steps to trim outstanding liabilities. Operating casinos is a cost-intensive endeavor, and there’s no shortage of large debt burdens in the industry, meaning market participants could favor stocks with stronger cash balances.

Casino Stock Free Cash Flow Generators

With interest rates rising and inflation soaring, companies’ ability to generate free cash flow is all the more important. Some casino operators possess that coveted trait.

Macquarie’s Beynon highlights Caesars Entertainment (NASDAQ:CZR), MGM Resorts International (NYSE:MGM), and Penn Entertainment (NASDAQ:PENN) as the land-based casino operators with stout free cash flow-generating potential.

While news emerged Friday that Penn is being removed from the S&P 500, Macquarie’s price targets on that stock and Caesars are more than double where those stocks currently reside. The research firm’s price forecast on MGM Resorts implies upside of 65%. Beynon has “outperform” ratings on all three gaming equities.

Some regional casino operators are also lobbing off impressive free cash flow traits. Among those in Beynon’s coverage universe are “neutral”-rated Boyd Gaming (NYSE:BYD) and Red Rock Resorts (NASDAQ:RRR).

Looking at Casino Growth Stocks

Beynon is also constructive on some casino growth stocks, including Bally’s (NYSE:BALY), DraftKings (NASDAQ:DKNG) and Full House Resorts (NASDAQ:FLL) – the first two of which have significant online gaming and sports wagering exposure.

“With online gaming stocks down -55% over the LTM (vs S&P 500 -13%), we view 2Q’s “lower-loss” results and seasonal trading into football season as reasons to own the group. Notably, names with online exposure outperformed the S&P 500 by 15% last year from Aug 1 – Sep 30,” added the analyst.

Beynon noted that the recent batch of disappointing initial iGaming and sports wagering data out of Ontario, Canada, can be offset by football-related acceleration across US states, where sports betting is live and legal.

“With recent data from Ontario (2Q OSB/iGaming revs of CAD$162m (USD$124m)) coming in slightly below expectations, albeit given several understanding factors, we still expect for recent states to see massive acceleration come the start of NFL season. Also noteworthy, KS went live with OSB Sep. 1,” concluded the analyst.