In a sweeping commentary on casino stocks today, Bank of America analyst Bank of America analyst Shaun Kelley recommends focusing on quality and value opportunities in the space.
In a note to clients, Kelley highlights at least seven gaming names, speaking bullishly on a quartet while downgrading a trio. Among the names the analysts like as quality and value plays are Boyd Gaming (NYSE:BYD) and Churchill Downs (NASDAQ:CHDN). The duo is off an average of 3.5 percent to start 2022. But that’s significantly less bad than the start to the year for a slew of casino stocks.
Las Vegas-based Boyd runs 28 gaming venues across 10 states, including 11 in its home city, and it’s that exposure to the local market that makes the company one of Wall Street’s preferred gaming ideas for 2022.
Both Boyd and Churchill are forecast to generate impressive free cash flow this year – a quality trait – and each is buying back their own shares, signaling management teams see value in those stocks. Speaking of value, the Kentucky Derby operator may be offering that, trading around $223, with a consensus price target of almost $280.
Challenges for Las Vegas Sands, Others
While Kelley sees a lot to like with Boyd and Churchill Downs, he’s less enthusiastic about Gaming and Leisure Properties (NASDAQ:GLPI), Las Vegas Sands (NYSE:LVS), and Red Rock Resorts (NASDAQ:RRR).
He downgrades all three names to “underperform,” and in the case of GLPI, it’s a double downgrade, because the stock goes from “buy” to “underperform,” while the other two were previously rated “neutral.” In the case of LVS, it’s the same old song: Macau. Ongoing lethargy in the world’s largest casino hub explains why so few on Wall Street are bullish on Sands today.
We see continued risk from COVID-related disruption and do not see a simple or easy exit from the implications for Macau of China’s zero tolerance COVID policy,” said Kelley. “In addition, we think key source markets around Southeast Asia could weigh on the pace of recovery in Singapore.”
The analyst adds concessionaires could pay more for Macau licenses when those permits are renewed, resulting in a lower return on invested capital, while perhaps hindering shareholder reward plans.
Regarding the downgrade of Red Rock, Kelleys says the operator could be vulnerable to tough comparisons following a strong 2021, and rising costs in a tight Las Vegas labor market. When it comes to GLPI, he says that gaming real estate firm has more inflation protection than rival VICI Properties (NYSE:VICI).
High Beta Ideas
Kelley believes higher beta casino stocks could bounce back in the second half of 2022, as estimates and margins see decreased volatility. He likes Caesars Entertainment (NASDAQ:CZR) and Penn National Gaming (NASDAQ:PENN) in that group.
Currently, there’s no shortage of support for Caesars, owing to what analysts view as its favorable mix of Las Vegas and regional exposure, coupled with a growing iGaming and sports wagering footprint.
With Penn, sentiment seems to be shifting to acknowledgment that the stock was battered too much last year and that investors may have lost sight of what’s a strong portfolio of land-based gaming assets.
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