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Gaming Industry Outlook: Macau to Hurt Near-Term Prospects

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The Zacks Gaming industry includes companies, which primarily own and operate integrated casino, hotel, and entertainment resorts. Some of the companies in the industry also deliver technology products as well as services across lotteries, electronic gaming machines, sports betting and interactive gaming.

Let’s take a look at the industry’s three major themes:

  • 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 as well as West Virginia. Moreover, Pennsylvania and Rhode Island are also likely to tread the same path in the coming months.
  • Improving tourism in Las Vegas and rising demand for gaming and leisure will continue to drive the industry. Most of the companies are opting for alternative avenues to expand customer base and business. Additionally, casinos operators are collaborating with the hospitality sector, setting up luxury hotels and taking initiatives for improving gaming businesses. Since these non-gaming services generate higher margins, companies are increasingly focusing on other streams to drive revenues.
  • Macau, the world’s largest gambling hub, remains volatile. Slowdown in China and the trade war between Beijing and Washington has impacted casino operators in Macau. Though gaming revenues from Macau increased for the 27th consecutive month in October, the growth rate has softened since the second quarter. Flagging China property price has impacted the high-end VIP segment. However, mass market revenues continue to be impressive. Moreover, Macau's Gaming Inspection and Coordination Bureau (“DICJ”) is increasing its audits of the junket industry owing to concerns over money laundering. Markedly, junkets are responsible for about half of gaming revenues in Macau. Thus, this crackdown may hamper Macau revenues.

Zacks Industry Rank Indicates Dismal Prospects

The Zacks Gaming Industry is grouped within the broader Zacks Consumer Discretionary Sector.

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. The Zacks Gaming industry currently carries a Zacks Industry Rank #235, which places it in the bottom 8% of 255 Zacks industries. 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. In the past year, the industry’s earnings estimate for the current year has gone down 9.4%.

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half in the past eight weeks.

Despite the industry’s drab near-term prospects, we will present a few Gaming stocks that one can hold on to. But it’s worth taking a look at the industry’s shareholder return and current valuation.

Industry Lags on Stock Market Performance

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 20.6% over this period against the S&P 500 Index’s rise of 7.3% and the broader sector’s increase of 5.4%.

One-Year Price Performance

Gaming Stocks Pretty Expensive

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 19.48, which is below the high of 23.96 in the past year and the median level of 21.01.

Clearly, there is limited upside potential. The space looks quite pricey when compared to the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 9.91 and the median level is 11.64.

Over the past five years, the industry has traded as high as 23.96X, as low as 10.54X and median of 13.42X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)

Bottom Line

Slowdown in Macau gaming revenues remains a concern for the industry in the short run. Speculations over another crackdown on capital outflows by China have kept investors on the edge. However, with continued innovation and rampant use of smartphones as well as other electronic devices, online gambling is fast gaining popularity and is positioned for long-term growth.

Below we have discussed three stocks that investors may want to hold on to for the time being. All the three companies are based in Las Vegas, NV.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Las Vegas Sands Corp. (LVS - Free Report) : The Zacks Consensus Estimate for 2018 earnings indicates year-over-year growth of 10.9%. In 2018, its top line is likely to witness growth of 1.2%. It has a Zacks Rank #3 (Hold).

Price and Consensus: LVS

MGM Resorts International (MGM - Free Report) : This Zacks Ranked #3 company has an estimated long-term earnings growth rate of 7.2%. The consensus estimate for 2018 earnings indicates year-over-year growth of 6.9%. Estimates for 2018 have witnessed upward revisions of 14 cents to $1.09 per share.

Price and Consensus: MGM

Boyd Gaming Corp. (BYD - Free Report) : The Zacks Consensus Estimate for 2018 earnings indicates year-over-year growth of 29.1% The company, a Zacks Rank #3 (Hold) stock, has an estimated long-term earnings growth rate of 15%. It came delivered average positive earnings surprise of 3.69% in the trailing four quarters.

Price and Consensus: BYD

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