MGM, Penn National, Red Rock Among Top Names For Regional Resurgence, Says Analyst

Posted on: August 29, 2019, 01:00h. 

Last updated on: March 2, 2020, 01:25h.

MGM Resorts International (NYSE:MGM), Penn National Gaming (NASDAQ:PENN), Red Rock Resorts, Inc. (NASDAQ: RRR), and shares of other regional gaming operators have recently struggled, but at least one analyst believes the group has been unjustly punished and sees opportunities for investors, as long they emphasize free cash flow (FCF).

Macquarie analyst Chad Beynon says that clear plans to bring down debt and for generating free cash flow (FCF) are the best ways for casino companies to thrive. (Image: CNBC)

In a note provided to on Wednesday, Macquarie analyst Chad Beynon said that while third-quarter comparisons may be tough for some regional companies to match, his firm likes the casino firms that are generating FCF and have clearly articulated plans to reduce debt.

Given that Aug/Sept comps will be tough to match, we expect flat to potentially down 3Q SS results and recommend adding stock positions where there are potential catalysts (asset sales, property and M&A ramps, Sports betting, insider purchases),” said Beynon.

MGM, one of the largest operators on the Las Vegas Strip, checks some of the boxes mentioned by Beynon. The company is reportedly shopping the Bellagio and MGM Grand, sales that could deliver $5 billion to $6 billion after taxes. Additionally, insiders have been buying shares of the Aria and Mirage operator this year and the company is expected to boost FCF next year.

Focus On Cash, Debt Reduction

Some regional gaming companies carry mountains of debt, but declining interest rates can provide some respite by serving to trim financing costs. At the end of the second quarter, MGM had $14.8 billion in liabilities while Red Rock Resorts had $2.9 billion in net debt.

While MGM is generating free cash and has clearly outlined plans to monetize assets and return capital to shareholders, investors may be treating the shares too harshly due to its Macau exposure argues Beynon. The analyst has an “outperform” rating and $34 price target on MGM stock.

“We believe investors are over-penalizing the stock and should look towards the bigger picture,” said the analyst. “Over the next two years, we believe MGM will grow EBITDAR (earnings before interest, taxes, depreciation, amortization and the fastest among its large cap peers and generate FCF to be returned to shareholders. Further, the company is well positioned over the long term, in our view, with a solid balance sheet and pipeline of potential value (Japan, sports betting, real estate monetization).”

Red Rock Resorts is lower by 36.2 percent over the past year and some investors have voiced concern about when the Palms renovations will bear fruit on the company’s bottom line, but Beynon believes as the firm gets the Palms house in order, it will see rising FCF next year and in 2021, which aid in management’s quest to significantly trim debt.

Beynon rates Red Rock “outperform” with a $28 price target.

Penn National: Cash and Sports Betting

Shares of Penn National are down nearly 47 percent over the past 12 months, but the stock has recently rallied off its 52-week by more than nine percent amid a major sports gambling push into states where it is already permitted and the company’s anticipatory positions in other states.

Beynon expects Penn to generate about $400 million of FCF this year with that figure rising six percent in 2020. He has an “outperform” rating and $30 price forecast on the stock, implying upside of almost 64 percent from Wednesday’s close.

“Investors do remain hesitant around the current leverage but a strong 2H19 and debt pay down in full swing could support shares going forward,” said the analyst.