Shares of casino operators with Las Vegas Strip and Macau exposure are performing well this year, but showings for regional casino stocks are far more tepid.
In a new report to clients, Deutsche Bank analyst Carlo Santarelli noted that while the regional gaming space is stable, it’s out of favor with investors “given the perceived higher likelihood off negative revisions, relative to upward revisions, within the group.”
With today representing the end of the second quarter, investors will turn their attention to upcoming earnings reports from regional operators. Owing to a rough calendar in April and some gross gaming revenue (GGR) retrenchment in May, the June quarter could be tough on regional operators, but overall spending at these venues remains steady.
Relative to 2019, spend per visitor remains ~30-35% higher, driving continued GGR growth, despite admissions remaining ~20% below 2019 levels,” observed Santarelli. “Recall, we believe the spend per visitor increase relates more to mix, with the lowest spending customers accounting for the majority of the shortfall in admissions, while the remaining customers spend only marginally more.”
With the summer travel season here, the third quarter could be a make-or-break period in terms of 2023 share price performance for some regional casino stocks.
Macro Issues Still Pivotal for Regional Casino Stocks
While there’s little evidence of economic contraction on the Las Vegas Strip and Macau is rebounding in earnest, macroeconomic headwinds linger for regional casino stocks.
Those include inflation sapping real wages and the specter of higher gas prices as the summer travel season kicks into high gear. While the Consumer Price Index (CPI) is declining, it’s still at more than double the levels seen at the end of 2020. Relevant to the gaming industry is the point that inflation has acted as a tax, by some estimates trimming US workers’ earnings for more than two years.
“From 2007 through 2019, average weekly earnings and regional GGR experienced a correlation of 0.88. Thus, we believe it is reasonable for investors to contemplate the relationship between real wages and GGR performance when looking ahead,” added Santarelli. “Given real wages have been down over the LTM period ending March, the healthy GGR performance, has been somewhat surprising, albeit it, favorable 1Q23 weather has helped.”
As of April, real wages declined nearly 4% since President Biden took office, according to the Repbulican-controlled House Budget Committee.
Personal Finances Impact Regional Casino Stocks
As Santarelli noted, household finances have “been a source of comfort for the gaming industry” over the past two years. That scenario was aided by massive government stimulus due to the coronavirus pandemic. However, the bill for that spending and other government spending is coming due in the form of higher inflation.
Recent data from the Federal Reserve indicate the US has $988 billion in credit card debt — a scenario made all the more ominous because the central bank is raising interested rates to combat inflation. As of yet, those situations aren’t punishing regional casinos.
“Despite savings trailing off meaningfully, from a Y/Y perspective in 2022, gaming spend, across our proxy set continued to grow, and accounted for ~2.6% of household savings flow for the year. This result surpassed levels last experienced in the 2010-2013 period, and was meaningfully above the normalized relationship over the course of 2014-2019,” concluded Santarelli.
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