Posted on: October 31, 2022, 11:22h. 

Last updated on: October 31, 2022, 12:38h.

Third-quarter earnings season is in full swing, and several casino operators already reported with an important takeaway: revenue is keeping pace with operating expenditures.

Casino Operators
The Las Vegas Strip. Casino operators’ revenue is keeping pace with spending, says an analyst. (Image: Visit Las Vegas)

Some of the casino companies that delivered results for the September quarter, including Boyd Gaming (NYSE:BYD) and Red Rock Resorts (NASDAQ:RRR), beat on the top line, and demand trends in Las Vegas remained sturdy this month.

In a note to clients today, Roth Capital analyst Edward Engel points out that while Wall Street is forecasting earnings before interest, taxes, depreciation and amortization (EBITDA) declines of approximately 5% next year, casino operators could prove resilient due to declining operating expenditures and steady gross gaming revenue (GGR).

Operators collectively acknowledged consistent demand trends throughout the quarter with no signs of slowing in October,” wrote the analyst. “Operators also found ways to keep headline EBITDA margins flat year-over-year, despite flat revenues and pressures from wage/commodity inflation.”

Engel added that demand trends on the Las Vegas Strip are “reaccelerating,” despite the region’s well-documented history of sensitivity to trying economic environments.

Lots of Value to Be Had with Shares of Casino Operators

Gaming equities of all stripes are being punished this year, but the silver lining is that some analysts see value in the downtrodden group.

Engel noted gaming stocks are trading at cyclical lows due to reduced EBITDA and that’s “more upside than downside” for names such as Century Casinos (NASDAQ:CNTY), Full House Resorts (NASDAQ:FLL) and Golden Entertainment (NASDAQ:GDEN). He has “buy” ratings on all three stocks.

In particular, Golden recently drew sell-side acclaim due to declining operating spending, an increasingly sturdy balance sheet, and management deploying capital to share buybacks, among other factors. Century and Full House are seen as plays on regional gaming resilience.

“Trends in both visitation and GGR/cap were stable vs prior months, with GGR/cap higher YoY alongside slight visitation declines,” said Engel of regional operators. “Looking into 4Q we believe underlying momentum should result in YoY GGR growth, particularly given easy comps related to Omicron last year. While we expect regional gaming demand to eventually slow with the economy, we believe this could be 3-4 quarters away.”

Speaking of Regional Casino Resilience

Further supporting the case for some regional casino names is the point that these operators are offsetting weaker demand among lower tier players from other higher-spending segments.

“Operators have acknowledged softness from lower-end demographics since early 2022; however, this has been offset by resilience across other segments,” concluded Engel. “In fact, even GGR from routes has been stable in recent months, despite more exposure to lower-end demographics. Meanwhile, there hasn’t been any indication that properties in more rural areas are underperforming.”

The regional casino investment thesis will be tested this week, as Bally’s (NYSE:BALY) and Penn Entertainment (NASDAQ:PENN) — the largest operator of such venues — deliver third-quarter results on Thursday, Nov. 3.