Regional operators, including Boyd Gaming (NYSE:BYD) and Penn National Gaming (NASDAQ:PENN), are benefiting as their properties come back online following the coronavirus shutdown. But a Bank of America (BofA) analysts sees other favorable fundamental tailwinds for the group.
In a note to clients today, analyst Shaun Kelley said regional gaming firms offer the best fundamentals in the industry. It’s a mix bolstered not only by strong demand in the reopening phase, but improving margins and the oft-cited sports betting catalyst.
Over 70 percent of all casinos are now open and the early trends are encouraging,” wrote Kelley.
The analyst also highlighted a “substantial rebound” in demand trends in select states, with some data points blowing out to new records in Arkansas, Kansas and Louisiana, just to name a few. Boyd Gaming, one of Kelley’s buy-rated names, owns a combined six gaming properties in Kansas and Louisiana. Penn National, which the analyst recently dubbed his preferred pick in the sector, operates several venues across both states, and the Pelican State is one of the company’s most important markets in terms of percentage of generated revenue.
Bad News in Good News
Analysts’ preference for regional names was a prominent theme during the COVID-19 shutdown. The market observers speculated visitors would be more eager to return to local gaming properties than they would be to hop on planes to fly to destination markets, such as Las Vegas.
Some company-specific commentary support that thesis. Earlier this week, Caesars Entertainment (NASDAQ:CZR) provided a reopening update, saying revenue at its restarted Nevada properties plunged on a year-over-year basis. But Caesars also said that its regional venues that recently came back online had flat to modestly higher turnover.
Kelley notes operators are saying margins are poised to be “meaningfully higher in the post-reopening months.” Some of that is being driven by reduced marketing expenses and the elimination of some lower profit amenities, like buffets. However, there’s a human side to the equation.
The analyst points out lower staffing levels are boosting margins. Some of those jobs may not return. Boyd recently said it may eliminate more than 10,000 roles across its portfolio, while Penn announced as many as 2,575 jobs could be permanently trimmed at 13 casinos and two corporate offices.
Looking Ahead
Broadly speaking, the BofA analyst sees 2021 turnover for regional operators falling five percent to 12 percent short of 2019 levels. But he acknowledges those numbers could be conservative.
Kelley highlighted a robust margin profile for Eldorado Resorts (NASDAQ:ERI) and said his 2021 forecasts for Boyd and Penn could prove to be on the low side. All three companies have exposure to the booming iGaming and sports wagering markets, segments that experienced strong growth in May.
The analyst has “buy” ratings on Boyd and Penn and a “neutral” rating on Eldorado. Off the March lows, Penn is the best-performing member of that trio, having surged more than 750 percent.
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