Gaming Stock Degradation ‘Overkill,’ Upside Available, Says B. Riley Analyst

Amid escalating fears that a recession is either here or soon will be, gaming stocks are among the most repudiated fare on Wall Street. But some analysts believe the group is enduring overly harsh punishment.

In a note to clients today, B. Riley analyst David Bain lowers price targets on a broad swath of gaming stocks, but notes the names remain undervalued and offer significant appreciation potential for investors.

While we reduce our gaming stock price targets to encompass macro risks, we believe our valuation methodologies represent a fairly strong hedge based on historical data and thesis points below,” writes Bain. “We believe the resulting price targets still leave gaming stocks undervalued, many of which have potential to double in stock price over the next twelve months.”

Bain trimmed price forecasts on Caesars Entertainment (NASDAQ:CZR), Century Casinos (NASDAQ:CNTY), Everi Holdings (NYSE:EVRI), Full House Resorts (NASDAQ:FLL), Gan Ltd. (NASDAQ:GAN), Golden Entertainment (NASDAQ:GDEN), and Genius Sports (NYSE:GENI).

For Gaming Stocks, Not Financial Crisis Sequel

As consumer discretionary names, gaming stocks are obviously vulnerable to economic contraction. But Bain argues current treatment of the group is pricing in a global financial crisis-type scenario that’s unlikely to materialize.

“Beyond ignoring casino geographic and other diversification, expanded room capacity during the 2007 to 2009 period hurts the low case, in our view,” adds Bain. “Palazzo LV, Wynn Encore, and City Center opened these years, resulting in GGR per LV room down 27%, though GGR per visitor was only down 12% (significant room expansion aggravated margin declines). Further, versus The Great Recession period, gaming has tailwinds from specific, structural offsets.”

Those offsets include the return of convention business, resumption of international travel, elevated domestic travel, more members of the 55+ demographic returning to casinos, and more revenue diversification by way of venues outside of Las Vegas.

Buying Opportunities Abound

While a recession would crimp casino operators, history indicates that, excluding the global financial crisis, economic contractions haven’t been overly punitive for Las Vegas operators.

“Between 1970 and 2019, there were seven recessionary periods and annual LV GGR contracted five times. While 2008/2009 LV GGR declined 9.9%/9.8%, the remaining three LV GGR contraction years averaged under 0.5%. Inclusive of all periods, 1970 to 2019 LV GGR growth averaged +7.3% per annum,” says Bain.

Regional casino revenue contracted just twice during that span.

Among gaming stocks that are currently buying opportunities, Bain highlights Caesars and Golden Entertainment on the basis of robust free cash flow generation. He adds both Century and Full House are undervalued relative to peers. Everi and Inspired Entertainment (NASDAQ:INSE) are also mentioned as opportunity-rich ideas.