The national average gas price is $3.829 per gallon, according to AAA, well above levels seen in late 2020, but off the highs set earlier this year. Those declines provided some support to regional casinos’ July gross gaming revenue (GGR) figures.
GGR at regional casinos declined 1% last month compared with a 2% drop in June. In a note to clients today, Roth Capital analyst Edward Engel said that modest improvement is likely attributable to a pullback in gas prices. The core customer base for many regional gaming venues usually make day trips to those properties, and usually drive to get there, making them sensitive to gas costs.
Even amid current macro pressures, we still model stable GGR through YE2022. While we acknowledge GGR is bound to eventually decline in a U.S. recession, regional demand trends seem to be lagging the broader economy,” wrote Engel.
The analyst added that comparables should be easier for operators to manage into the end of 2022. That’s because there were no major hurricanes affecting casinos in the South this year, and the COVID-19 Omicron variant outbreak of December 2021 is unlikely to repeat this year.
Regional Casinos Could Be Durable Earlier in Recession
Due in large part to political spin, there’s currently unprecedented debate regarding whether or not the US economy is in a recession. The textbook definition of recession is two consecutive quarters of declining GDP data — a condition the US meets.
On the other hand, market observers rightfully argue that employment data don’t jibe with traditional economic contraction scenarios. Still, the share prices of casino operators, including those with extensive regional portfolios, are pricing in a recession.
Engel points out that regional casinos could be durable in the early stages of a recession, and may not be vulnerable until a material increase in unemployment data arrives.
“Rather, we don’t expect GGR to soften until unemployment picks up, which is typically a late-cycle event. As economists generally forecast a recession starting 2H23, we still see at least 3-4 quarter of GGR resiliency,” said the analyst.
Regional Casino Equities Inexpensive
With market participants fretting about the specter of recession, shares of regional casino operators are inexpensive across the board.
“Given the uncertainties towards the timing/magnitude of a recession, the YTD slide in stock prices has been multiple driven, as investors price in EBITDA declines in 2023-24. As such, EV/EBITDA multiples remain near trough lows. In a scenario where economic concerns subside, we’d expect investors to quickly flock towards gaming stocks, given headline valuations trade near cyclical lows,” concludes Engel.
Among the regional operators the analyst rates “buy” are Century Casinos (NASDAQ: CNTY), Full House Resorts (NASDAQ:FLL) and Golden Entertainment (NASDAQ: GDEN). He has a “neutral” grade on Penn Entertainment (NASDAQ:PENN), which is the largest regional casino company.
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