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The casino gaming market has seen steady growth since the June 2016 quarter and there’s nothing to suggest that there will be a reversal in this growth trend. On the other hand, there are good reasons why growth should continue over the next few years.

A Little Government Support

The most important if unlikely of these is government support. Gambling is of course illegal, yet the prospect of taxes (as high as 25%) on earnings is attractive and can be used by any welfare state to build schools, infrastructure and so forth. Besides, the industry employs a large number of people and therefore has an impact on the jobs market. So governments cross the world are moving to reduce restrictions on gambling.

The Chinese government crackdown on illegal fund transfers from mainland China to Macao was a big blow for the gambling business there. But new resorts with a focus on leisure rather than pure gambling are helping players return to the black. Gambling remains illegal in Brazil and Japan, but governments in both these countries are growing more receptive to the idea, which is a positive development for the industry.

Back home in Nevada, the government has been lowering restrictions and there’s a new bill that could lower the legal gambling age limit from 21 to 18 years. In some states and for some types of games such as bets on horse racing in Arkansas, Delaware, Florida, Indiana, Louisiana, Maine, New Mexico, Ohio, Pennsylvania and Washington, the legal age is already 18 years.

Tribal casinos in Alaska, Idaho, Minnesota and Wyoming are also legal for 18-year olds. While the age group isn’t likely to have a lot of extra cash, this could expose them to the thing at an earlier age, potentially increasing revenue for the industry.

There’s also another aspect to legalization, which is the reduction of unaccounted for transactions resulting in black money. For instance, sports betting is illegal in most countries, although people spend and make millions from it. So this money often leaves the concerned country to safe havens.

A Little Extra Cash

According to numbers provided by the U.S. Bureau of Economic Analysis (BEA), the real disposable income has been rising through 2017. While it peaked in June and dropped off thereafter because of the impact of Hurricanes Harvey and Irma, it has been growing again since then and remains much higher than it was a year ago. While personal consumption has also been rising (most of the increase is in food and energy), the trend is positive for the gaming market overall because it indicates that people have more money to spend on leisure.

A Little Convenience

Millennials are a digital race, so they’re used to getting most of what they need on their electronic gadgets, usually mobile devices. As a result, there is an increased focus on online gaming, including DFS, lottery, poker and casino games. Technavio says that traditional channels still account for 93% of all gaming revenue in the U.S., but since the younger crowd is moving to online channels, that scenario could change quickly. So regulators are also taking stock. It’s likely that online channels will be increasingly legalized going forward.

A Lot More Variety

The prospect of betting on online sports immediately opens up a new category in eSports that has become hugely popular through titles like League of Legends, Call of Duty, Street Fighter, Dota 2, etc. The participation and viewership on these games is huge and the category is likely to explode over the next few years (it’s already giving away millions of dollars in prize money) given Amazon’s purchase of Twitch, YouTube’s launching of YouTube Gaming and even media shops like ESPN jumping into the scene to broadcast the games.

Goldman Sachs via BI Insights estimates that the market will grow at a CAGR of 22% over the next three years from $500 million in 2016 to $1 billion in 2019. The firm estimates that 300 million people view eSports today and by 2020, that number will be as high as 500 million. Newzoo estimates that the market will grow from $493 million in 2016 to $1.1 billion in 2019. Market research firm Eilers & Krejcik Gaming estimates that eSports betting turnover is likely to reach $23 billion by 2020 with operators generating more than $1.8 billion in related revenue.

The increase in the popularity of gambling apps and social gambling will also be major drivers.

Another thing that can excite/interest younger gamers is a skill based return to player, such as GameCo’s Danger Arena, a patent pending video game gambling machine. The slot machine is designed to generate higher returns to more skilled players while also ensuring some returns to low-skill players. An element of chance is also built in.  

Growth Rates

The global casino gaming market is expected to grow at a CAGR of 10.16% during the period 2017-2021, according to Research and Markets. Technavio estimates that the U.S. casino gaming market will grow at a CAGR of close to 5% from 2017 to 2021.

The Macau Gaming Inspection and Coordination Bureau has published encouraging numbers: gross gaming revenues for October increased 22.1% year over year to roughly $3.3 billion or 26.6 billion patacas (the highest since 2014, indicating that the impact of Chinese regulatory actions have blown over).

The Nevada Gaming Control Board estimates that gambling revenues in the state increased nearly 3.3% in September 2017 from a year ago to $979.9 million with particular strength in casino revenues from the Las Vegas Strip, which grew 4.7%. Reno revenues were up 9.2%.

The Zacks-categorized gaming market has grown revenue steadily from the June quarter of 2016 with the gross margin growing from the March quarter of 2016 and net income before non-recurring items growing from the September quarter.

So let’s take a look at the picks for today-

Wynn Resorts Limited (WYNN - Free Report)

Wynn Resorts owns and operates Wynn Las Vegas and Encore in Las Vegas; as well as Wynn Macau (including Encore) and the Wynn Palace in the Special Administrative Region of Macau in the People's Republic of China. The company is constructing Wynn Boston Harbor, an integrated casino resort in Everett, Massachusetts.

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

The company topped estimates in three of the last four quarters at an average rate of 15.4%. In the last 30 days, the EPS estimate moved up 6.5% for the current quarter, 7.6% for the next quarter, 8.1% for 2017 and 6.8% for 2018. 2017 revenue and earnings are estimated to grow 37.9% and 57.4%, respectively. 2018 revenue and earnings are currently expected to grow 4.6% and 20.4%, respectively.

PADDY POWER BET (PDYPY - Free Report)

Paddy Power Betfair plc operates as an online betting and gaming company. It is headquartered in Dublin, Ireland.

Zacks Rank #1

The Stars Group (TSG - Free Report)

The Stars Group engages in the design, development, manufacture, distribution and sale of technology based gaming products and services. Its products include interactive gaming, land-based gaming and lottery solutions. The Stars Group Inc., formerly known as Amaya Inc, is headquartered in Toronto, Canada.

Zacks Rank #2 (Buy)

The company topped estimates in three of the last four quarters at an average rate of 11.0%. In the last 30 days, the EPS estimate moved up 5.6% for 2017 and 2.7% for 2018. 2017 revenue and earnings are estimated to grow 12.3% and 20.7%, respectively. 2018 revenue and earnings are currently expected to grow 6.6% and 2.0%, respectively.

Churchill Downs Incorporated (CHDN - Free Report)

Churchill Downs conducts thoroughbred racing including America's greatest race, the Kentucky Derby. Churchill Downs, has Five racetracks; Six casinos; Big Fish Games, the world's largest distributor of casual games; TwinSpires.com, the country's leading online wagering business; a video poker business, a multi-state network of off-track betting (OTB) facilities; and a collection of racing-related data, totalisator and telecommunication companies that support its sports and gaming operations.

The launch of TwinSpires.com, an advance-deposit waging platform that allows customers to wager on horse racing from computers, tablets and smart phones, created another retail outlet for wagering transactions and data distribution.

Zacks Rank #2

The company topped estimates in three of the last four quarters at an average rate of 9.5%. In the last 30 days, the EPS estimate moved up 5.5% for 2017 and 13.2% for 2018. 2017 revenue and earnings are estimated to grow 2.7% and 29.3%, respectively. 2018 revenue and earnings are currently expected to grow 5.7% and 23.1%, respectively.

Eldorado Resorts, Inc (ERI - Free Report)

Eldorado Resorts provides casino and entertainment services primarily in Nevada and Louisiana. The company's facilities and services include casino games; hotels; entertainment and events; signature and casual restaurants; various venues; and guest services. Its casino also provides facilities for meetings and special events; catering and banquet services; and golf, ski, Reno bowling, baseball, basecamp climbing, truckee river, Reno fernley raceway and museum services. Eldorado Resorts is based in Reno, Nevada.

Zacks Rank #2

The company topped estimates in the last quarter, reversing a trend of negative surprises. In the last 30 days, the estimated loss for 2017 went down from 29 cents to 8 cents while the estimated profit for 2018 moved up 14.5%. 2017 revenue and earnings are estimated to grow 75.4% and -115.4%, respectively. 2018 revenue and earnings are currently expected to grow 8.4% and 2068.8%, respectively.

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