Wall Street analyst David Katz has “more bullish expectations” for second-quarter earnings, based on strength in Las Vegas, as Jefferies Equities Research provided an overview of gaming stocks and outlooks for operators.

“We remain selectively constructive on U.S. casinos into second-quarter earnings, given mixed fundamentals in Macau, Las Vegas, and regional markets,” Katz wrote in a note to investors. “We continue to expect strength in Las Vegas near and long term, uninspiring recovery in Macau with China macro overhang, and regionals to remain choppy with isolated growth.”

To varying degrees, Katz views some casino stocks more favorably than others, but commentary from management teams skews more bullish.

“We remain constructive on Caesars, MGM, and Red Rock Resorts, given the positive setup in Las Vegas and our view that the market has not yet peaked, and on Churchill Downs, given its unique growth profile,” Katz said. “Our high-level focus for earnings calls is centered around the competitive landscape and recent trends across key markets, upcoming capital projects and broader plans for growth, capital allocation priorities, and insights around the consumer amidst weakening economic trends.”

The quarter turned out “better than anticipated for some,” Katz said; the best upside in the quarter could come from Caesars, MGM, and Boyd Gaming.

“In the near term, we disagree with the view that Las Vegas has peaked and the quarter should support our view. Revenue growth is moderating and labor costs are rising, but comps are easier for MGM and Caesars (both about 6% EBITDA in second quarter) and Strip supply is exiting the market (1,878 rooms from Tropicana in April, 3,000 from Mirage in July). Las Vegas locals should also normalize and adjust to the new supply.”

Katz said Clark County gaming revenue grew through May, up 3% for the month and 4% over the last 12 months. Commentary also suggests a strong June. “We highlight Boyd on the potential for a solid report on low second-quarter expectations.”

Katz cited revenue down 12%, EBITDAR down 11% year over year, and shares up 13% since the first-quarter report for Boyd.

Macau continues moderate post-COVID recovery, but China’s macro overhang remains a barrier, Katz said. The recovery in Macau continues to make headway, with gaming-revenue levels in the first half of 2024 averaging 42% higher than 2023 and 24% lower than 2019.

“June as expected marked the lowest growth month (+16.4% year over year) so far in 2024 and July has started off slower than expected, down 3% to 5% month over month versus historically higher by 6%,” Katz said. “We expect the lack of near-term catalysts – with the next significant month not until October with Golden Week – and macro overhang to continue to temper Las Vegas Sands and Wynn shares, capping valuations below long-term averages of 9x-10x.”

Mature gaming markets outside of Las Vegas experienced strong recoveries post-COVID, but have since normalized with minimal growth expected.

One of the stocks Jefferies focused on is Churchill Downs. This year is progressively demonstrating the pivot, with EBITDA growing 9.5%, 9.6%, and 13% in the second quarter 2024 and 2025, respectively, “while leverage ramps down to ~4X in 2024 and 3.6X in 2025.”

Churchill Downs is a Buy with a $160 price target, up 5%. It closed Thursday at $139.60.

“Churchill Downs remains a stand-out across the group for its unique growth avenues,” Katz said. “The current slate of capital projects should keep pushing shares higher, with the longer-term decision set on the strategic path providing longer-term upside. Churchill Downs has optionality with leverage and capex set to peak in 2024, according to our estimates. There could be a scenario where strong results in Richmond, Dumfries, and Terre Haute could drive leverage below 4x this year. Churchill Downs is still a growth story with a unique opportunity set, which we believe should mitigate any concerns over valuation.”

Penn Entertainment’s regional business “should prove in line with the group,” but Katz believes the focus remains on potential strategic change and that impact on land-based and digital peers.

Jefferies has Caesars with a Buy rating at a price target of $62, down 5%. It closed Thursday at $38.96.

“Positive commentary is raising estimates for the first time in a while,” Katz said. “The strength in Las Vegas, management’s confidence in the pivot to profits in digital (2025 EBITDA target of $500 million), continued deleveraging, and potential non-core-asset divestitures create a favorable setup for Caesars versus peers in our view. Las Vegas should be back to a normal $500 million EBITDA quarter from here, with supply exiting the market, the Versailles Tower completed, and the walkway completion favoring upside. Estimates should be revised higher for the quarter while regional comps remain mixed and expectations well-placed.”

With Caesars’s earnings report, the focus is on the performance of the regional gaming business and the competitive pressures and mixed comps, Katz said. In addition, they will look at digital as a strategic priority and the path to meeting the $500 million EBITDA 2025 target, in addition to prior commentary on non-core-asset sales.

Las Vegas Sands is a Hold with a $47 price target, down 11%. It closed Thursday at $42.32.

“The uncertainty of the China macro continues to put pressure on LVS shares,” Katz said. “The recovery in Macau continues to make headway. May gaming revenue reached a post-pandemic peak (up 29.7% year over year, 22.2% below 2019), while June as expected was the lowest growth month in 2024, up 16.4% year over year and 25.7% below 2019 levels. In the first half of 2024, gaming-revenue levels have averaged 23.9% lower than those of 2019. Though the recovery is progressing, ongoing renovations for LVS in Macau will weigh on revenues and profits in 2024 and we continue to think the China macro will pressure valuations and temper shares.”

MGM is a Buy with a $62 price target, unchanged. It closed Thursday at $45.84.

“We remain bullish on MGM in the near term, as strength in Las Vegas and easing comps should create positive momentum for the shares,” Katz said. “The partnership with Marriott has exceeded expectations so far (all 16 brands were integrated with Bonvoy in the first quarter), Las Vegas should continue to accelerate, and the event calendar is strong. Further, easing comps as we lap the cybersecurity attack in 2023 and improved positioning in Macau should help drive growth from here. The setup is favorable in our view.”

In the second-quarter earnings call with MGM, Jefferies is focused on the outlook in Macau for the remainder of the year, as well as where current expectations stand for market-share trends and margins, Katz said. Additionally, they expect an update on BetMGM’s performance and product development, Las Vegas quarter-to-date trends, and commentary regarding the results of Marriott’s partnership in the quarter following the integration of all 16 brands in the first quarter.

Wynn is a hold with a $96 price target, down 14%. It closed Thursday at $84.61.

“Uncertainty surrounding China macro continues to weigh on Wynn shares and Macau as June gaming revenue came in weaker than expected,” Katz said. “Margins in Macau have improved, though macro concerns persist and continue to weigh on valuations. While recent earnings momentum could persist in some markets, the long-term growth projects and associated capital requirements continue to keep us on the sidelines.”

In the earnings call with Wynn, Katz is focused on the outlook for gaming in Macau given the struggling China macro, negative gaming revenue revisions in June, and recent market-share trends.

“In addition, we’re looking for additional color on capital-investment expectations, particularly for Al Marjan Island (in the United Arab Emirates) and any plans for excess asset utilization in Las Vegas, as well as quarter to date trends in Las Vegas,” Katz said.

Jefferies rated Penn as a Hold. Land-based estimates should be on track, with digital a key focus and long-term setup toward profitability less clear. “We expect activism to remain in the background as ESPN Bet approaches football season, which is important for the business to establish its path forward.”

Jefferies’s focus on the second quarter is on commentary around the recent activist activities, land-based trends, expectations for promotional spending, updates on the digital strategy, and progress toward long-term value creation, the U.S. roll-out of Score tech/product, and expectations for capital allocation.

Jefferies rated Bally’s as a Hold. Katz wrote, “Bally’s continues to present a balanced set of puts and takes for the time being. The Chicago permanent casino, the Oakland A’s move to Las Vegas, the pending New York license, and the open offer from the chairman at $15 a share provide the company with several unique opportunities. However, uncertainties surrounding these capital-intensive projects, the pending go-private process, elevated leverage, and forthcoming capital needs will continue to position quarters more about catalysts than the results.”

Katz expects the earnings call to focus to center on Standard General’s outstanding offer to purchase the remaining shares of the company, the current funding status for the permanent casino in Chicago, and the timeline for Tropicana construction. In addition, Bally’s is expected to discuss the results of Rhode Island’s igaming launch compared to expectations, updates on the New York license, and an overview of casino trends amidst ongoing competitive pressures.

The year started off softer than expected for Boyd, but Jeffries expects improvement versus expectations in the second quarter and the shares that have “an upward bias.” While regional gaming remains mixed with softer trends and competitive pressures in some markets, the weather will not negatively impact the second quarter. Boyd capital projects are coming along and management contracts and digital businesses will be additive to growth.

“In our view, capital returns are also supportive of the shares,” Katz said. “We remain balanced, as Boyd continues to operate in a puts and takes environment.”

For Boyd, Jefferies’s focus will be on regional gaming trends, competitive pressures from new properties, particularly Red Rock Resort’s Durango Casino & Resort in southwest Las Vegas, and an update on the performance of Boyd Interactive. They will also be looking for updated guidance, room remodels across properties, capital expenditure plans, and the company’s capital allocation priorities.

Red Rock Resort is rated a Buy.

“Red Rock Resort’s strong position within the flourishing Las Vegas locals markets and land bank of 441 acres continue to drive our bullish stance on the company,” Katz said. “RRR opened its $793M Durango property in December, which continues to attract consumers from the surrounding area and perform better than expected. We expect RRR’s 2024 outlook to continue progressing higher through 2024, while leverage decreases to 3.4x by 2025 toward their 3.0x long-term target.”

In the earnings call, Katz and company are focused on regional gaming trends and Durango’s continued performance compared to expectations, the competitive landscape, an update on future projects, and technology updates.

Monarch Casino & Resort is listed as a Hold, faced with the challenge of defining its growth strategy post the successful ramp of the Black Hawk property. “With suboptimal leverage and minimal capital-growth plan, the shares are limited in upside potential absent a more defined direction.”

Jefferies focus is the potential M&A opportunities for the next chapter of growth, along with trends in both the Reno and Denver markets, room-renovation progress, and capital-allocation priorities.

Golden Entertainment is listed as a Hold.

“We continue to look for a more defined path of growth to become more constructive on Golden,” Katz said. “With the sale of the last non-core asset completed in the first quarter, leverage declined, allowing Golden to focus on capital returns and future M&A opportunities. There is plenty of opportunity for growth and we continue to believe the company will become either a buyer or seller in the near term.”

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