Churchill Downs and MGM among hottest gaming equity ideas ahead of second-quarter results
The second-quarter earnings season kicks off this week, with only days left before gaming companies enter a period of penance.
Overall, gaming stocks underperformed the S&P 500 in the first half of the year. But Churchill Downs (NASDAQ: CHDN ) and MGM Resorts International (NYSE: MGM ) could be among the industry's winners this earnings season and beyond. That's the view of Macquarie analyst Chad Beynon, who highlighted the pair in a comprehensive client note on Wednesday.
Looking ahead to the second half of 2020, we expect gaming stocks to outperform given stable fundamentals and discounted valuations. ” the analyst wrote. “Historically, the sector has had a strong correlation with macroeconomics, but fundamentals have recently outperformed inflation as overall wealth creation, particularly among older age groups, has been driven. "
June consumer price index (CPI) data released on Wednesday showed a month-on-month rise of just 0.2%, below economists' expectations. While rapid government spending last year pushed inflation to multi-decade highs, it is now cooling and that easing could benefit the Las Vegas Strip and regional casino operators.
Churchill Downs: Area Highlights
Although Churchill Downs has no stake in the Las Vegas Strip and concerns remain about the state of the U.S. horse racing industry, the stock is a betting favorite on Wall Street.
Beynon named the stock one of his top ideas for the second half of the year, calling it a top performer among regional gaming companies due to its strong product pipeline and projected three-year compound annual growth rate of more than 20%. That's the highest among analysts, excluding Macau casino stocks.
In addition to the continued expansion of assets that came online last year, other drivers of the investment thesis at Churchill Downs include improvements to its namesake famed Kentucky track, as well as expansion of its historic horse racing machines (HRMs) and regional casinos. Multiple states.
“This diverse growth includes 1) First Round Experience; 2) DCG Extension/Hotel; 3) LA HRM in OTB; 4) DCG Louisville Town Center, in addition to asset construction beginning in 2022 and ending in 2024 In 2020, we expect 1) additional EBITDA project returns from the Paddock project to exceed $190 million; 2) Queen of Terre Haute, 3) P2E Growth (Dumfries, Rosie's Emporia, other HRMs); 4) Chaser (NH) and Exacta Systems transactions $35 million," Beynon noted.
The Vegas vibe is strong for MGM
MGM, up 40.35% this year, is one of the gaming stocks outperforming the market, with results driven in part by a strong Las Vegas Strip and Macau's recovery.
Beynon praised the operator's "upscale" moves in Sin City, including the acquisition of Cosmopolitan and the sale of Mirage. The deals increase MGM's leverage with luxury consumers, who tend to be less vulnerable to recessions. The analyst added that BetMGM is thriving and said investors may not fully understand the operator's business in Macau.
"In the digital space, we expect BetMGM's revenue to grow approximately 35% by 2023 and continue to believe there are opportunities to address the 50/50 split. With one of the strongest balance sheets, supportive shareholders and the opportunity to become a global digital Leaders’ goals, we expect opportunities to address ownership issues to be a priority,” Beynon concluded.
Translation: MGM owns 50% of BetMGM, while Entain controls the other half. But the former now has the resources to potentially acquire the latter from the agreement.
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Source: www.casino.org
