The Zacks Gaming industry comprises companies that primarily own and operate integrated casino, hotel, and entertainment resorts. Some of the industry participants also offer technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming.
Major industry players include Wynn Resorts, Limited (WYNN - Free Report) , Las Vegas Sands Corp. (LVS - Free Report) , MGM Resorts International (MGM - Free Report) and International Game Technology PLC (IGT - Free Report) .
Let’s take a look at the industry’s three major themes:
- The coronavirus pandemic has hit gambling hubs — Macau and Las Vegas — hard. Although most of the casinos in Macau and Las Vegas have resumed operations following the coronavirus-induced shutdown, casino tables are still empty. This has resulted in a sharp decline in Macau gross gaming revenues (GGR) in July. Notably, gaming revenues from the world’s largest gambling hub fell for the 10th consecutive month. Moreover, GGR slumped more than 90% for the fourth straight month. In July, gaming revenues from Macau plunged 94.5% to 1.3 billion patacas ($162.89 million) following a decline of 97% in June. This can primarily be attributed to reduction in footfall as China continued to decline individual and group visas to Macau as a safety precaution. The government has also enforced body temperature check at casino entrances.
- Nevertheless, the worst seems to be over for the gaming industry in Macau as China is slowly easing certain restrictions. In mid-July, the Guangdong province lifted quarantine measures. Moreover, Macau has started issuing tourist visas again. In phases, Visas for both individuals as well as group tours from mainland China will be reinstated. Macau is a special administrative region (SAR) of China like Hong Kong. However, it is not still clear when visas will be made available to tourists willingly to travel to Macau from outside China.
- Legalization of sports betting outside Nevada has given the industry a new lease of life. The Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA) that banned sports betting outside Nevada. The scope for casino operators will grow as illegally the activity is valued at billions of dollars annually in the United States. Sports betting has been legalized in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire. Moreover, Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states are likely to follow suit in the coming months. Most of the gaming companies are focusing on sports betting to drive growth. We believe sports betting market is likely to witness sharp growth in the days ahead. Moreover, the US iGaming market is estimated to achieve revenues of nearly $6.9 billion by 2025.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector. It carries a Zacks Industry Rank #119, which places it in the top 47% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates drab near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks from the industry that you may want to consider, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags Sector and S&P 500
The Zacks Gaming industry has lagged the broader Zacks Consumer Discretionary sector as well as the S&P 500 Index over the past year.
The industry has declined 3.7% over this period against the S&P 500 Index’s and the broader sector’s rally of 15.5% and 6.3%, respectively.
One-Year Price Performance
Gaming Industry’s Valuation
Since gaming companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. The industry currently has a trailing 12-month EV/EBITDA ratio of 22.04 compared with the high of 22.16 in the past year and the median level of 12.1. Additionally, the industry is trading at a premium when compared to the market at large, as the trailing 12-month EV/EBITDA for the S&P 500 composite is 12.74X.
Over the past five years, the industry has traded as high as 22.16X and as low as 7.75X, with median being at 13.27X, as the chart below shows.
Enterprise Value-to EBITDA Ratio (Past 5 Years)
The coronavirus pandemic has been hurting the gaming industry as most of the casinos are witnessing lower traffic due to the outbreak. However, continued innovation, increasing use of smartphones and other electronic devices, and rise in online gambling bode well for the industry.
Here we present a two stocks with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
These stocks are well positioned to grow in the near term.
Monarch Casino & Resort, Inc. (MCRI - Free Report) : The company owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, NV. The consensus mark for the company’s current-year earnings has been revised to 22 cents from a loss of 32 cents in the past 30 days.
Price and Consensus: MCRI
Red Rock Resorts, Inc. (RRR - Free Report) : Red Rock Resorts is engaged in casino entertainment, and gaming and entertainment businesses in the United States. The Zacks Consensus Estimate for current-quarter earnings has witnessed upward revisions of 29.3%.
Price and Consensus: RRR