Posted on: July 18, 2022, 02:22h. 

Last updated on: July 18, 2022, 03:09h.

Caesars Entertainment (NASDAQ:CZR) is among the casino operators that could benefit as consumers direct more discretionary spending toward services away from goods, according to a research firm.

Caesars Palace Las Vegas. Morningstar sees Caesars stock benefiting from shifts in consumer spending. (Image: Bloomberg)

During the initial days of the coronavirus pandemic, consumer spending largely focused on goods. Conversely, services, such as nearly anything related to travel, languished due to pandemic-related restrictions, reduced airline flight offerings, and vaccine requirements, among other factors. That trend is reversing and it could be to the benefit of travel and leisure equities, including casino operators.

As spending shifts back to services, one of the areas that we think is best poised to benefit is the travel and entertainment industry. This sector includes air travel, cruise lines, gaming, hotels, and ride-hailing, and is supported by technology providers dedicated to the travel sector,” writes Morningstar analyst Dave Sekera.

There’s something to that thesis as the American Gaming Association (AGA) last week noted that May 2022 was the best May on record for the domestic commercial casino industry, with gross gaming revenue (GGR) of $5.1 billion, representing the industry’s second-best month on record. That’s particularly relevant for Caesars, because by number of venues, it’s the largest casino operator in the country.

Caesars Has Goods to Capitalize

As with other gaming equities, Caesars is slumping this year. The shares are sagging due to culprits such as inflation and margin concerns. On the bright side, margin concerns may be exaggerated, and Caesars may have some momentum on that front.

Additionally, the Harrah’s parent is the second-largest on the Las Vegas Strip — a status that is vital to the underlying investment thesis. Sin City is in the midst of one its best GGR stretches ever. That’s taking place with still-slack Sunday through Wednesday occupancy rates, indicating that when convention and meeting business returns in earnest, casino companies such as Caesars could benefit in material fashion.

“With over 60 million members in its industry loyalty program, leadership in digital and sports gaming, and additional synergies to be derived from its merger with Eldorado in 2020, we think Caesars is the best positioned to benefit from the recovery in the gaming industry,” notes Sekera.

The Morningstar analyst adds MGM Resorts International (NYSE:MGM) is another potential beneficiary of elevated consumer services spending. The research firm has five-star and four-star ratings, respectively, on Caesars and MGM.

Hotel Rebound Could Lift Caesars

Obviously, getting guests to the tables and slot machines is a vital part of the casino business model. But for integrated resort operators such as Caesars, filling hotel rooms is nearly as important.

On that front, there’s evidence of a potential rebound materializing, and that could gather more momentum in 2023, assuming conventions return to Las Vegas.

“As vacations were postponed and business trips canceled in 2020, on average the amount of revenue per available room dropped more than 60% across the hotel industry,” concludes Sekera. “Revenue and occupancy levels began to rebound in 2021, and in 2022, we expect that many hotels will return to 90% of their prepandemic levels. Generally, we expect the hotels under our coverage to return to prepandemic levels in 2023.”