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Gaming Industry Outlook: Macau Volatility Continues to Hurt

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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, West Virginia, Pennsylvania and Rhode Island. Moreover, Connecticut, Illinois, Kentucky, Michigan, Indiana, Massachusetts, Maryland and more states 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. Per a report published by Morgan Stanley on Jan 18, Las Vegas casinos will shine in 2019. Moreover, the firm suggests that investors looking to invest in casino stocks this year should look no further than Los Angeles- based casinos. 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 to improve 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 have impacted casino operators in Macau. Though gaming revenues from Macau increased for the 29th consecutive month in February, it lagged analysts’ expectation. However, revenues form the region declined 5% in January. However, gaming revenues for the period January to February Chinese New Year declined 0.5% compared to a year ago. Flagging China property price impacted the high-end VIP segment. The recent smoking ban in the city impacted the 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 money laundering concerns. Markedly, junkets are responsible for about half of gaming revenues in Macau. Thus, this crackdown may affect 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 #205, which places it in the bottom 20% of 256 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. Since Oct 31, 2018, the industry’s earnings estimate for the current year has gone down 16.6%.

Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half in the past seven 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 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 17.8% over this period against the S&P 500 Index’s rise of 9.8%. The broader sector has declined 0.4% in the said time frame.

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 12.51, which is below the high of 24.29 in the past year and the median level of 21.50. 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 10.84 and the median level is 11.08.

Over the past five years, the industry has traded as high as 24.29X, as low as 10.46X and median of 13.26X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)

Bottom Line

Volatility in Macau gaming revenues remains a concern for the industry. Speculations of 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.

None of the stocks in the gaming space currently sports a Zacks Rank #1 (Strong Buy). So, we are presenting one stock with a Zacks Rank #2 (Buy) and three stocks with a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zynga Inc. : This San Francisco, CA based company has a Zacks Rank #2. The company has an impressive long-term earnings growth rate of 22.5%. The Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 162.5%. Estimates for 2019 have witnessed upward revisions of 4 cents to 21 cents per share in the past 60 days.

Price and Consensus: ZNGA

Las Vegas Sands Corp. (LVS - Free Report) : The consensus estimate for this Las Vegas, NV based company’s 2019 earnings has witnessed upward revision of 0.6% in the past 30 days.

Price and Consensus: LVS

MGM Resorts International (MGM - Free Report) : This Las Vegas, NV based, Zacks Ranked #3 company has an estimated long-term earnings growth rate of 7.5%. The consensus estimate for 2019 earnings indicates year-over-year growth of 17.2%. Estimates for 2019 have witnessed upward revision of 4 cents to $1.16 per share in the past 30 days.

Price and Consensus: MGM

Boyd Gaming Corporation (BYD - Free Report) : This Las Vegas, NV based company’s Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 35.3% The company, a Zacks Rank #3 stock, has an estimated long-term earnings growth rate of 21.1%. It delivered average positive earnings surprise of 7.5% in the trailing four quarters.

Price and Consensus: BYD

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