According to a Wall Street analyst, Las Vegas Strip and local casinos are the best in the industry heading into 2024, despite the challenges of higher labor and facility costs and tough comparisons to a strong 2023.
“Despite pricing and cost challenges through 2024, the sector and local population remain the most attractive market for casino operators, driven by the group’s recovery and the sports and events calendar,” David Katz of Jefferies Equities Research said in a note to investors.
Caesars Entertainment and MGM Resorts International are benefiting from sector fundamentals, while Red Rock Resorts is “positioned for growth” with a December opening of Durango Casino & Resort that beats expectations, Katz said.
“As we look to Las Vegas in 2024, we expect casino operator revenues to remain relatively flat compared to the previous year due to challenging comps, but potential catalysts for growth include a strong event calendar,” Katz said. “However, while revenues remain flat or grow slightly, we expect adjusted EBITDA margins to continue to trend downward as a result of increased operating costs.”
In November, Caesars, MGM and Wynn Resorts reached agreements with Culinary Union Local 226, covering about 35,000 hospitality workers. The ratified five-year agreements will provide unionized workers with the largest wage increase in history, a 10% raise in the first year and a total increase of 32% over the term of the new agreement.
“Management teams’ commentary indicated that labor, facilities and insurance all impact the bottom line and are expected to do so in the future,” Katz said.
Regional casinos outside of Las Vegas are expected to continue to deliver mixed results in 2024, Katz said. In mature gaming states, gaming revenues have steadily improved since the start of the pandemic, with a full recovery in 2022.
“However, 2023 regional gaming revenues struggled to beat the tough comparison to the previous fiscal year,” Katz said. “In addition to difficult comparisons compared to 2022, macroeconomic headwinds also negatively impacted current year results. We expect companies operating in regional markets to see minimal overall growth, with margin deteriorating through FY2024.
For example, Boyd Gaming and Bally’s, which generate 52% and 59% (excluding interim Bally’s Casino in Chicago) adjusted EBITDA from regional properties, are expected to see a 200 basis point decline in margins by the year, Katz said. Fiscal 2024. Looking to fiscal 2025, Katz expects margins in regional segments to stabilize, with growth returning to normal at around 2%.
Growth has been rare and Churchill Downs is one operator enjoying it, Katz said.
“There are few new markets in 2024, with the exception of Kentucky and Virginia which Churchill Downs is uniquely endowed with, and 2024 should gradually show a pivot from cap expenses to cash flow growth,” Katz wrote.
“Meanwhile, PENN’s regional business should prove in line with the group, but continued focus on positive early launch metrics from ESPN Bet should continue to support the shares’ recent momentum.”
As for Macau, Katz said it continues its post-Covid-19 recovery due to the macroeconomic deterioration in mainland China, and this remains a headwind for stocks. Macau saw gradual improvement with gaming revenues in December down nearly 19% from 2019 levels.
Jefferies’ forecasts for Wynn and Las Vegas Sands in 2024 will achieve 76% and 90% of 2019 levels, respectively. By fiscal 2025, Las Vegas Sands, Wynn and MGM should be operating at about 103%, 92% and 137% of their 2019 EBITDA levels, respectively, Katz said.
“The main factors for a further rise are the absence of illegal businesses and concerns about the economy in China,” Katz said. “Despite a strong Lunar New Year approach and continued improvement in overall gaming revenue, Wynn and Las Vegas Sands should remain below their long-term valuation averages of 9x to 10x.”
Jefferies gave Caesars Entertainment a Buy rating, citing continued deleveraging, improving digital positioning and a strong Las Vegas city partially offset by higher costs.
“The shift to profitability in the digital sector, which lifts EBITDA from $43 million in 2023 to $338 million by 2025, coupled with stabilization in Las Vegas, should overcome moderate weakness in regional gaming and higher costs. “Overall, we like the setup of Caesars compared to most of their peers today,” Katz said.
MGM also has a Buy rating from Jefferies. “It’s possible that something will happen on the digital side,” Katz said. “Las Vegas remains strong, but costs are a headwind. The digital business has been weak in 2023 and there appears to be a change afoot with joint venture partner Entain, which we expect That will lead to a more positive performance in 2024.
“The Las Vegas market continues to accelerate, although the cost side of the equation is a headwind,” Katz said. “The sector’s casino operators have agreed to the highest-ever pay increase for union workers over five years, which will negatively impact EBITDA margins. However, we believe these are currently priced into the stock and that the outlook for Las Vegas and a rebound is positive.” Macau, digital earnings and other growth opportunities should drive value over the long term.
Wynn is on hold, Katz said, with uncertainty surrounding China and total gaming revenue hovering around 70% in the second half of 2023. In fiscal 2025, they expect the company to gradually regain pre-coronavirus levels of revenue and EBITDA, Katz said. With Wynn Macau and Wynn Palace Cotai properties operating at 70.4% and 86.3% in 2019. Impacting EBITDA margins as costs continue to rise.
Boyd Gaming is also on the ropes, with Katz anticipating pressure from “volatile regional gaming markets and competition among Las Vegas locals.” Margins shrink as labor and utility bets increase. Over the next two years, they expect revenue to grow by 85 basis points and adjusted EBITDA to decline by 180 basis points.
“The online segment and revenue generated from the digital arrangement with FanDuel are expected to offset mixed regional gaming results,” Katz said.
Red Rock Resorts has a Buy rating, as the company continues to operate successfully thanks to a thriving Las Vegas market, a strong portfolio of 305 developable acres and an actively marketing 217 acres. “The opening of the flagship Durango hotel in December will drive growth for the company as initial performance has been above expectations.” However, Red Rock, similar to other operators in Las Vegas, is expected to see profit margin deteriorate due to higher operating expenses.
Las Vegas Sands is on hold. Uncertainty in China continues to weigh on LVS. In the second half of 2023, excluding December, overall gaming revenue levels averaged 28% lower than in 2019. The removal of VIP adventures increases uncertainty surrounding the future of the core and premium fan segments.
“Visit levels and overall gaming revenue should improve heading into FY2024 as we expect the Lunar New Year and Golden Week holidays in May and October to act as catalysts.” In addition, the $1 billion capital expenditure to renovate Marina Bay Sands in Singapore should generate an additional $250 million in EBITDA in FY2024 and FY2025.
Golden Entertainment is on hold. The operator continues to look for its next opportunity to enhance value. Following the sale of its distributed gaming segment, the company continues to focus on improving its operations in Nevada, specifically through renovations at The STRAT and properties within its bar portfolio. “Given the leverage, adjusted for selling dealer games and Rocky Gap Casino is 1.0 to 1.5 times, there is a lot of opportunity for growth,” Katz said. “We tend to think he will become either a buyer or a seller in the relatively near term.”
Pennsylvania National pending. Katz wrote that preliminary data points from ESPN Bet should provide PENN with near-term catalysts, while the long-term setup toward profitability remains less clear. Promotional spending expectations rose in the fourth quarter of 2023, which will be slightly offset by lower spending in the second quarter and third quarter of 2024. “Regardless of digital technology, regional businesses continue to operate modestly, despite the faltering environment,” Katz said.
Bally’s is an outstanding company. The Chicago casino project and the Oakland A’s move to Las Vegas provide the company with many opportunities. The temporary facility in Chicago generated revenue of about $8 million in October and November, and is expected to continue to increase over the next year.
“In addition, Bally’s has the opportunity to redevelop the remaining 26 acres of the Tropicana Las Vegas site following the conversion of the Stadium A project into a potential hotel,” Katz said. “Despite the unique gaming opportunities, the company generates all of its positive EBITDA from US regional gaming and global digital gaming, which we view as modest growth businesses, partially offset by US digital gaming losses.”
Churchill Downs is a buy. It has many avenues for growth that should go far beyond the industry, Katz said. Katz said the company still faces higher expenses, including labor costs, which have and will impact properties like Del Lago in New York. However, the company’s capital investment pipeline, including the opening of Terre Haute in Indiana and Dumfries in Virginia in the second quarter of 2024, should offset higher costs and allow the regional gaming and historic racing segment to grow two to three times expected by 2025.
In the digital space looking ahead to fiscal 2024, Katz is starting to see the performance differential in casino operators’ digital businesses widening. After several years of heavy investment, Caesars achieved its first quarter EBITDA in the second quarter of 2023 and expects to generate $178.3 million and $338.2 million in fiscal 2024 and 2025, respectively.
“In addition, despite headwinds from the joint venture with Entain, BetMGM was profitable in the third quarter of 2023 for the first time and should post its first full year of EBITDA in 2025,” Katz said. “On the other hand, we expect further losses for both Penn and Bally’s, which will impact the overall profitability of each company.”
After investing $4.5 billion in its interactive segment to date and its new partnership with ESPN, Penn will have negative earnings. He added that it is important to note that PENN is interested in obtaining a gaming license in New York which will increase its already significant investment.