Posted on: June 4, 2022, 03:02h.
Last updated on: June 5, 2022, 02:58h.
The Consumer Discretionary Select Sector Index is off 25% year-to-date, and gaming stocks are among the drags on that benchmark. But at least one research firm sees shares of casino operators as the best bets in the consumer cyclical space.
In a recent note to clients Bank of America, analyst Shaun Kelley highlights the simplicity of the gaming stock thesis and points out these names have some advantages over other consumer discretionary segments, including retailers.
Gaming has some key advantages vs. other discretionary sectors: 1) no inventory/gross margin risk, 2) no commodity/input cost risk, 3) no foreign exchange risk, and 4) healthier balance sheets vs. pre-COVID,” he wrote.
Regarding improving balance sheets, there is evidence of that through the casino industry, as an array of operators are buying back significant amounts of stock, and some are restarting dividends that were suspended at the start of the coronavirus pandemic.
Lower Headcounts Could Benefit Gaming Stock
One of the primary themes in the gaming industry emerging in the wake of the coronavirus pandemic, particularly among regional operators, is improving margins.
Said another way, COVID-19 forced gaming companies to take a long look at what was working and what wasn’t, particularly on the non-gaming sides of their businesses. The result was major increases in margins, indicating operators were doing more with less.
As a result, investors are pondering for how long casino operators can sustain elevated margins. Kelley points out impressive margins are sustainable because gaming industry staff counts are lower today than prior to the pandemic.
“Our average company has 27% fewer employees at the end of 2021 vs. 2019. So we think margin expansion is less about reduced promo, marketing, or unsustainable cost leverage, and more about pure headcount,” said the analyst in his report.
Boyd, Caesars Among BofA’s Top Gaming Stock Picks
In alphabetical order, Bank of America’s preferred gaming stock ideas include Boyd Gaming (NYSE:BYD), Caesars Entertainment, and Penn National Gaming (NASDAQ:PENN). Based on Kelley’s price targets, that trio offers average upside potential of nearly 52%. Boyd is the only one of the group topping the broader market this year.
As for a recession, that would be a clear drag on gaming equities. But the industry could prove more durable than expected if the economy contracts.
“The net is we estimate a ~10% earnings before interest, taxes, depreciation and amortization (EBITDA) risk in a mid-case recession scenario and loss of ~200-400 basis points in property-level margins, but this is only about 20%-40% or less than half of the margin expansion gained during the pandemic,” concludes Kelley.