Regional Gaming Stocks Bottom Nearing, Says Analyst

Posted on: January 30, 2022, 01:54h. 

Last updated on: January 30, 2022, 03:05h.

Buoyed by government stimulus and pent-up demand, regional gaming stocks were industry leaders following the coronavirus market collapse in 2020 and into 2021. But as those catalysts waned, so did enthusiasm for the stocks. One analyst believes a bottom could be near.

regional gaming stocks
Slots players at a Penn National casino in Ohio. An analyst says regional gaming stocks can rebound. (Image: Columbus Dispatch)

In a recent note to clients, Roth Capital’s Edward Engel notes regional gaming valuations are approaching levels not seen in several years. But there’s also the specter of potentially slowing demand.

With regional gaming multiples approaching trough levels from 4Q18, we see similarities between today’s sentiment and back then. Similar to 4Q18, investors are looking beyond recent gross gaming revenue (GGR) resiliency, under the belief that current demand is unsustainable,” says Engel.

This year, regional gaming stocks such as Century Casinos (NASDAQ:CNTY), Full House Resorts, and Penn National Gaming (NASDAQ:PENN), among others, are being punished, as market participants fret about a variety of factors. Those include the spread of the omicron variant of the coronavirus, easing of government pandemic benefits, soaring inflation, and rising interest rates.

Interesting Catalysts for Regional Gaming Stocks

While regional gaming stocks are faltering, some market observers argue the recent punishment endured by the group is too severe, and ignores potentially favorable catalysts.

Regional gaming equity bulls point to factors such as these venues not being dependent on air travel, strong cash flow generation, the possibility of GGR finally returning to 2019 levels, and sustaining of margin growth realized during the pandemic. Engel notes there are other compelling factors for investors to ponder.

“These include sports betting’s impact on visitation, early benefits from cashless gaming, and most importantly, the return of older demographics. This creates an interesting backdrop for owning regional gaming stocks as we approach a ‘post-COVID’ summer in 2022,” said the analyst.

Engel adds that retail sportsbooks, which aren’t high-margin on par with online equivalents, are paying dividends in terms of bringing a new customer base to land-based casinos. Those clients are supporting both sports betting and table games.

Consider Consolidation

Entering 2022, it was widely expected that regional operators would be participants in industry consolidation, whether it be through acquiring venues from larger operators or outright takeovers.

There are already signs of that playing out. Last week, hedge fund Standard General offered $38 a share for Bally’s (NYSE:BALY), prompting some analysts to say that bid is merely a starting point. Still, some patience may be required before regional gaming stocks materially rebound.

“We believe 2022 could shape up better than investors expect, where stocks are pricing in EBITDA declines. However, until older demographics begin to return, we see investors looking past resilient monthly GGR,” said Engel. “Rather, investors might have to wait until later this spring for multiples to rebound. Timing the end to COVID has proven difficult. But if the pandemic does become endemic by the summer, we see a significant rerating opportunity for the group.”