Boyd, Red Rock, Other Regional Casino Names Warrant Caution, Says Analyst

Gaming companies with limited or no Las Vegas Strip exposure are proving sturdy relative to their Sin City-centric counterparts. But one analyst says it might be time to take some chips off the table.

JPMorgan analyst Joseph Greff, advises clients to embrace regional gaming equities on pullbacks, not at current, lofty prices.

We are surprised with the 2021 share price strength, which follows torrid share price performance in the 4Q20,” said the analyst. “And given current valuation levels, we generally think the group is much better to be bought on pullbacks than putting in fresh money at current levels.”

With coronavirus restrictions still in place at gaming venues across the country, many on Wall Street don’t expect the industry to show signs of earnings and revenue recovery until the back half of this year.

On that note, Greff pared fourth-quarter first half 2021 earnings before interest, taxes, depreciation and amortization (EBITDA) estimates for an array of regional gaming names. They include Boyd Gaming (NYSE:BYD), Caesars Entertainment (NASDAQ:CZR), Churchill Downs (NASDAQ:CHDN), Penn National Gaming (NASDAQ:PENN) and Red Rock Resorts (NASDAQ:RRR).

Regional Casinos Still Grappling with Pandemic

The JPMorgan analyst points to “rising COVID-19 infection rates and the ensuing impact of casino restrictions on regional gaming visitation and spend” as reasons for his downward revisions.

For example, Boyd and Red Rock generate significant portions of their revenue and EBITDA from the Las Vegas locals segment. Many of those patrons are staffers at other casinos, tying those operators to the Strip’s rebound, even though all of their Sin City venues are off the Strip.

Likewise, Caesars is the second-largest operator on the Strip. But its regional portfolio is deeper than that of rival of MGM Resorts. That’s a plus, but Greff sees tepid results for regional operators across the board during the first half of 2021.

“Similarly, we expect 1Q21 regional results to be similar to December’s and expect 2Q21 to be modestly better than the 1Q21; as such we are lowering our 1H21 estimates,” he said in a note to clients.

Churchill, Penn National

Churchill Downs and Penn National Gaming are classified as regional gaming names, with the latter boasting the biggest roster of such casinos in the country.

However, the stocks are up 28 percent and 236 percent, respectively, over the past year, as investors increasingly view these names as iGaming and online sports betting plays first, and casino operators second. Market participants baking in online casino and sports wagering on the likes of Churchill and Penn leads to higher valuations, something Greff cautions about regarding the broader regional group.

“And given current valuation levels, we generally think the group is much better to be bought on pullbacks than putting in fresh money at current levels,” wrote the analyst.

He has “outperform” ratings on all the stocks mentioned here.