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4 Gaming Stocks That Are Braving Industry Challenges

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The Zacks Gaming industry is gradually witnessing improvement in performance after the coronavirus pandemic hit the industry last year. Although Macau, Las Vegas and Singapore are showing signs of recovery, revenues and traffic from the regions are still below pre-pandemic levels. Reopening of the economy and roll out of vaccinations have been reinstating investors’ confidence. The industry players have been benefiting from robust demand for sports betting. Stocks like Boyd Gaming Corporation (BYD - Free Report) , Golden Entertainment, Inc. (GDEN - Free Report) , Red Rock Resorts, Inc. (RRR - Free Report) and Century Casinos, Inc. (CNTY - Free Report) are likely to benefit from the aforementioned factors.

Industry Description

The Zacks Gaming industry includes companies that primarily own and operate integrated casinos, hotels and entertainment resorts. Some of the industry players also deliver technology products and services across lotteries, electronic gaming machines, sports betting and interactive gaming. Some of the industry participants also develop and operate gaming establishments as well as associated lodging, restaurant, horse racing and entertainment amenities. A few companies are involved in the development as well as sale of gaming applications. They provide e-sport or sporting events and tournament services as well as offer content management system, video software, mobile applications and e-sports data platform solutions.

Key Themes Shaping the Gaming Industry

Visitation Still Below Pre-Pandemic Level: Traffic has been a major concern for the gaming industry since the coronavirus pandemic hit last year. Nevertheless, the industry is gradually coming out of the woods. Casino visitation in Macau has increased considerably in the first week of September. Lei Wai Nong, the city’s secretary for economy and finance, stated that Macau registered 24,000 visitations on Tuesday compared with average daily visitation of 21,000 in the first half of 2020. Traffic was down in August due to the coronavirus-related alert. Although visitation is likely to continue improving in the coming months, it is expected to take time to attain the pre-pandemic levels. Despite the early September gain, the average is still 66% below the tally recorded in the same period in 2019. Per Fitch Ratings, Macau’s GGR in 2021 will be “nearly 65 percent below 2019 levels.” In 2022, revenues will recover to 35% below 2019, while full recovery is anticipated by 2024. Companies have been focusing on levels of services and staffing with selective amenities, enhanced safety and social distancing protocols in the gaming floor to welcome gamers.

U.S. Commercial Gaming Revenue Hit Record: The gaming industry in the United States is recovering faster than anticipated. According to the data from the American Gaming Association, revenues from gambling hit a record high of $13.6 billion in the second quarter of 2021. Revenues from states, where gambling is legal, were up 22% from the earlier record of $11.1 billion achieved in third-quarter 2019, when the pandemic had not hit. Gambling was already flourishing in the United States till the pandemic hit early last year. In 2019, revenues from gambling hit a record high of $43.6 billion. On a year-to-date basis, gambling revenues have totaled around $25 billion. According to the report, 22 of the 25 states where gambling is allowed, saw revenues growing in the second quarter from the same period a year ago.

Sports Betting Major Growth Driver: The legalization of sports betting in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire has been driving growth. Moreover, bettors are now able to place wagers through the digital platforms in Connecticut, Kentucky, Michigan, Massachusetts, Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona, Montana, Colorado and other states. Some of the popular igaming applications include DraftKings, Barstool, FanDuel, BetMGM, BetRivers, Fox Bet and BetMonarch. Markedly, the applications have been an important medium for gamers to connect, learn and inspire amid the stay-at-home restrictions. Meanwhile, since the outbreak of coronavirus, Boyd Gaming has been witnessing solid performance by the interactive gaming platform. Backed by its strategic partnership with FanDuel, the company is optimistic regarding its future in the iGaming industry.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Gaming industry is grouped within the broader Zacks Consumer Discretionary sector.  It carries a Zacks Industry Rank #175, which places it in the bottom 31% of more than 253 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy 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.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2020, the industry’s loss estimate for the current year has widened by 27.1%.

Despite the industry’s drab near-term prospects, we will present a few gaming stocks that one can add to the portfolio, given their strong fundamentals. But it’s worth taking a look at the industry’s shareholder return and current valuation first.

The Industry Underperforms the S&P 500

The Zacks Gaming industry has lagged the S&P 500 Index, but has outperformed the broader Zacks Consumer Discretionary sector in the past year.

The industry has increased 33.4% over this period compared with the S&P 500 Index’s rally of 35.5%. The sector has gained 15.6% over the same time period.

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 forward 12-month EV/EBITDA ratio of 50.99. The space is trading at premium compared with the market at large as the forward 12-month EV/EBITDA ratio for the S&P 500 is 16.44.

In the past five years, the industry has traded as high as 55.58X and as low as 5.8X, with a median of 9.34X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)


4 Zacks Gaming Stocks to Add to the Portfolio

Boyd Gaming: Headquartered in Las Vegas, NV, Boyd Gaming is a multi-jurisdictional gaming company. The company has been undertaking efforts to expand online betting offerings. One of the notable initiatives by the company is the legalization of sports gambling. Post coronavirus-induced shutdowns, an increase in traffic from local and regional customer base is likely to benefit the company. It considers the local market in Las Vegas as a major driver for its portfolios. With restaurants and bars open, frequent visitation of locals is likely to drive growth for the company.

Shares of this Zacks Rank #1 (Strong Buy) company have soared 103.6% in the past year compared with the industry’s rally of 15.6%. Moreover, the company’s 2021 earnings are anticipated to increase 3,220%. In the past 60 days, earnings estimate for 2021 has been revised upward by 44.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: BYD

Golden Entertainment: The company together with its subsidiaries, owns and operates a diversified entertainment platform in the United States. It is gaining from increase in casinos and distributed gaming revenues.

Shares of this Zacks Rank #1 company have appreciated 223.3% in the past six months. Moreover, the company’s 2021 earnings are anticipated to increase 48%. In the past 30 days, earnings estimate for 2021 has moved north by 404.3%.

Price and Consensus: GDEN

Red Rock Resorts: Based in Las Vegas, NV, the company not only manages but also owns an equity interest in Station Casinos (“Station LLC”). It is seeing robust visitation from the younger demographic. The company is witnessing higher spend per visit and more time spent on device. Red Rock Resorts is benefiting from the continued roll out of vaccine, removal of capacity restrictions (for Clark County on Jun 1, 2021) and federal stimulus money. It anticipates to return to 100% occupancy. Red Rock Resorts’ Las Vegas operations have been a key growth driver in the past few quarters and the trend is likely to continue in the coming quarters.

Shares of this Zacks Rank #1 company have skyrocketed 138.8% in the past year. In the past 60 days, earnings estimate for 2021 has witnessed upward revision of 1,716.7% to $1.09.

Price and Consensus: RRR

Century Casinos: Based in Colorado Springs, CO, the company operates as a casino entertainment company worldwide. The company is benefiting from properties reopening. The company also has a robust balance sheet, with no significant debt maturing before 2026.

Shares of this Zacks Rank #2 (Buy) company have increased 11.8% in the past year. In the past seven days, earnings estimate for 2021 has witnessed upward revision of 87.5% to 60 cents.

Price and Consensus: CNTY

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