In what’s been a brutal year for growth stocks, it’s not surprising the consumer discretionary sector — the home of casino equities — is flailing, but some analysts are backing Las Vegas Sands (NYSE:LVS) and MGM Resorts International (NYSE:MGM) as actionable investing ideas.
In a recent report to clients, Citi equity strategist Scott Chronert noted that the bank’s view that valuation declines at the hands of the Federal Reserve’s aggressive interest rate hike hasn’t changed and that market participants’ earnings expectations are what matters going forward.
With this note, we move more toward the Growth-style and further away from our style agnostic call since May. Among factors, we prefer Quality and Momentum over Min/Low Vol and Enhanced Value,” he wrote.
Neither MGM nor Sands fit the bill as low volatility stocks and that’s been one this year’s best-performing investment factors, but momentum and quality could be applicable for the pair of casino stocks. On a relative basis, LVS has momentum as the stock is up 2.66% year-to-date while the S&P 500 is lower by almost 19%.
MGM, Sands Leading Consumer Cyclical Ideas
Citi screened the S&P 1500 Index for companies it rates “buy” or “sell” across all of the 11 global industry classification standard (GICS) sectors.
Within consumer discretionary, the bank is constructive on nine names, including LVS and MGM. Those are the only casino equities in that group. No gaming names are found among the trio of consumer cyclical stocks Citi is bearish on.
On any basis, Citi’s positive tone on the Bellagio and Marina Bay Sands operators is notable, but that’s even more true when considering the bank is forecasting increasing probability of a recession in the first half of 2023. A recession will almost assuredly crimp consumer spending, potentially pinching gaming stocks in the process.
“We project a growing recession probability during 1H ‘23. Over the intermediate term expect volatility between a 3650-4700 range as investors weigh weaker growth versus a potentially less hawkish Fed,” Chronert added.
MGM, Sands Quality Traits
The quality picture for the Mandalay Bay and Parisian Macau operators is mixed. Both, as is the case with most of the casino industry, carry sizable debt loads and neither is rated investment-grade by all three major ratings agencies.
Sands hasn’t restored its dividend nor has it repurchased its own stock since the onset of the coronavirus pandemic. While MGM’s annual payout equals a measly one cent a share, the casino giant has been a dedicated buyer of its shares dating back to last year and significantly reduced its shares outstanding count. That is a quality trait.
Both operators share a quality trait: Strong cash hoards. At the end of the second quarter, LVS had $6.46 billion in cash on hand while MGM $5.78 billion in cash as of June 30.
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