Inflation and interest rates are putting pressure on gaming industry M&A, analysts say
Earlier this year, the Federal Reserve was widely expected to cut interest rates from a 20-year high, which could trigger a wave of mergers and acquisitions in the casino gaming industry, but that did not materialize.
After a series of stubbornly high consumer price index (CPI) data to start 2024, expectations that the Federal Reserve could cut interest rates three to six times this year have all but come to nothing, with some market watchers speculating that the Fed may have a winner. Borrowing costs won't be lowered until next year. That could hinder consolidation in the gaming industry, said Truist Securities analyst Barry Jonas.
Lower interest rates could be a catalyst for increased M&A and more sale-leaseback activity—transactions in which casino operators monetize real estate holdings while maintaining operational control of the venue.
The paper is likely to be delayed as the Fed attempts to combat stubborn inflation," Jonas wrote in a new note to clients.
The gaming industry has seen some consolidation since the start of the year, with International Game Technology's (NYSE: IGT) global gaming and PlayDigital divisions worth a combined $6.2 billion, including Everi's (NYSE: EVRI) is one of its largest merger transactions to date. However, there is nothing noteworthy about a casino operator's marriage or a company that buys and sells personal property.
Many Gaming Stocks Offer Attractive Values
While rising interest rates due to ongoing inflation have prompted gaming companies to reduce debt and refinance -- moves welcomed by analysts and investors -- the conditions are weighing on share prices.
Whether it's casino stocks, gaming equipment maker stocks, or real estate investment trusts (REITs) that own gaming properties, these stocks have collectively lagged the overall market this year. Furthermore, fading expectations for a rate cut are depriving the group of the catalyst it needs.
"But without M&A and predictable organic growth, many of our companies are stuck in the value space," Jonas added.
Analysts on Tuesday lowered their price targets on four gaming stocks, including Caesars Entertainment (NASDAQ: CZR ), but raised Bally's (NYSE: BALY ) and Red Rock Resorts (NASDAQ:RRR) price predictions.
Long-term gaming REITs have higher returns
Real estate is one of the most interest-rate sensitive sectors - as evidenced by the S&P Real Estate Select Industry Index's 8.3% decline so far this year. By comparison, the S&P 500 is up 6.7% year to date.
Expectations that the Fed's short-term policy will be "higher and longer" are weighing on casino landlord stocks. Gaming and Leisure Properties Inc. (NASDAQ: GLPI ) is down 12% year to date, while Caesars Palace owner VICI Properties Inc. (NYSE: VICI ) is down 10.82%.
Jonas noted that the current environment may not be conducive to large-scale transactions by Gaming REITs. That could change, however, as interest rates stabilize and it becomes clearer when the Fed will cut borrowing costs.
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Source: www.casino.org
