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Gaming Industry Outlook: Macau Performance a Pressing Concern

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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:

  • Macau, the world’s largest gambling hub, has disappointed investor as the region’s Casino gross gaming revenue (GGR) declined in the second half of 2019. Gaming revenues from Macau fell to 22.9 billion patacas ($2.8 billion) this November compared with 25 billion patacas a year ago. Notably, a slowdown in China and the trade tensions between Beijing and Washington continue to impact casino operators in Macau. Additionally, protests in Hong Kong as well as regulatory uncertainty over high-roller junkets impacted the gaming industry. At the VIP segment, the Chinese state media’s attack on Macau's major junket operator, Suncity, has hurt demand to a large extent. Reflective of this, gaming revenues from the region declined 3.2% in October. Casino gross gaming revenues declined in seven months this year.
  • 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 and other states are 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 industry players 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 offer higher margins, companies are increasingly focusing on other streams to drive revenues. Moreover, increase in millennial visitation bodes well.

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 #200, which places it in the bottom 21% 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 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 Jun 31, 2019, the industry’s earnings estimate for the current year has gone down 16.1%.

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

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 gained 14.6% over this period compared with the S&P 500 Index’s rally of 18.6% and the broader sector’s increase of 17.8%.

                          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 12.26 versus the high of 20.5 in the past year and the median level of 12.14. 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 9.3 and the median level is 10.92.

Over the past five years, the industry has traded as high as 24.16X, as low as 10.5X and median of 13.06X, as the chart below shows.

                 Enterprise Value-to EBITDA Ratio (Past 5 Years)

Bottom Line

Volatility in Macau gaming revenues is a concern for the industry. Moreover, the trade war between Beijing and Washington is an overhang. However, continued innovation, increasing use of smartphones as well as other electronic devices and rise in online gambling bode well for the industry.

Below we have discussed four stocks with a Zacks Rank #3 (Hold) which investors may want to hold on to for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Las Vegas Sands Corp. LVS: The Zacks Consensus Estimate for the company’s 2020 earnings indicates year-over-year growth of 6.4%. In 2020, its top line is likely to witness growth of 1.3%.

                                  Price and Consensus – LVS

MGM Resorts International (MGM - Free Report) : This company has an estimated long-term earnings growth rate of 6.7%. The consensus estimate for its 2020 earnings indicates year-over-year growth of 69.2%. In 2020, the company’s revenues are likely to witness growth of 2.9%.

                                        Price and Consensus – MGM

Boyd Gaming Corporation BYD: The Zacks Consensus Estimate for the company’s 2020 earnings suggests year-over-year growth of 13.9% This company has an estimated long-term earnings growth rate of 13%. In 2020, its top line is likely to witness growth of 1.3%.

                                         Price and Consensus – BYD

Melco Resorts & Entertainment Limited MLCO: The Zacks Consensus Estimate for the company’s 2020 earnings indicates year-over-year growth of 28.7%. The company also has an impressive long-term earnings growth rate of 21.3%.

                                Price and Consensus – MLCO

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