Regional Casino Q3 Earnings Could Impress, Analyst Has Penn Concerns

Posted on: October 5, 2022, 12:49h. 

Last updated on: October 5, 2022, 04:39h.

Third-quarter earnings season starts in earnest next week, and downtrodden shares of regional casino operators could give investors something to talk about. Gross gaming revenue (GGR) trends in the group remain sturdy.

regional casino
A slide from a Golden Entertainment earnings presentation. An analyst is bullish on regional casino Q3 earnings. (Image: Golden Entertainment)

That, despite expectations to the contrary, prompted analysts earlier this year to issue downward GGR revisions for the second half on a slew of regional casino operators.

In a note to clients, Roth Capital analyst Edward Engel says recent management commentary suggests demand trends were steady in the July through September period. That supports the notion that third- and fourth-quarter GGR should surprise to the upside, paving the way for earnings before interest, taxes, depreciation, and amortization (EBITDA) beats.

Regional GGR grew 1.9% YoY in Aug, with 3Q22 GGR pacing +0.5% YoY. Aug’s YoY growth snapped June/July’s streak of YoY declines. Aug 2022 had one less weekend day than last year, although calendar shifts are neutral for Sept. We model Sept GGR +1% YoY, which would put 3Q growth in-line with 2Q’s +0.5%,” noted Engel.

With a deluge of casino company earnings arriving in the coming weeks, some on Wall Street are constructive on the group, including Las Vegas-centric and regional operators. They argue that some of these stocks have been unjustly repudiated this year.

Cautious on Penn

As the largest regional casino operator, Penn Entertainment (NASDAQ: PENN) can be seen as a bellwether for the group. But Engel urges caution on the name, noting there are “red flags” to consider.

“Heading into 2022, investors were cautious of new competition cannibalizing PENN’s market share in certain markets. 3Q demonstrated this, with meaningful GGR declines in Pennsylvania and Illinois,” said the analyst. “We’re also concerned with Penn Interactive’s 3Q EBITDA losses, as Penn invests in ramping certain new markets (Louisiana, Kansas, Ontario).”

The analyst also noted that even when ignoring the cash Penn is spending on what appears to be an ill-fated venture on California’s Proposition 27, an uptick in losses could amplify investors’ concerns regarding Penn’s ability to turn profits in its iGaming/sports wagering unit.

In more encouraging news, Penn’s promotional spending has long been rational relative to industry norms, and that precedent remains in place today. The company is also making investments in important regions to bolster market share.

Regional Casino Names to Consider

While Engel isn’t bullish on Penn, he highlighted some opportunities among regional casino stocks, including Golden Entertainment (NASDAQ: GDEN). The company is in the process of selling the Rocky Gap Casino Resort in Flinstone, Md., which will make it an exclusively Nevada operator.

“We like the set-up for GDEN into 3Q results, where Southern Nevada continues to be one of the best-performing markets post-pandemic, with July/Aug GGR +25% vs 2019. As citywide events pick up this fall and compress mid-week hotel rates, we expect GDEN’s Strat bookings to continue regaining lost room nights since COVID,” added the analyst.

Regarding Full House Resorts (NASDAQ: FLL), he says that story revolves largely around new venue openings in Colorado and Illinois. On Century Casinos (NASDAQ: CNTY), Engel notes that the operator’s third-quarter results could be pinched by currency headwinds due to its exposure to Canada and Poland.

He has “buy” ratings on Century, Full House, and Golden Entertainment while grading Penn “neutral.”