Gaming stocks could be consumers’ best bets, says BofA analyst
Published on: June 4, 2022, 03:02h.
Last update on: June 4, 2022, 03:02h.
The Consumer Discretionary Select Sector Index is down 25% year-to-date and gaming stocks are among the drags on this benchmark, but at least one research firm is considering casino operator stocks as the best bets in the cyclical consumer space.
In a recent note to clients, Bank of America analyst Shaun Kelley underscores the simplicity of the gambling stock thesis and points out that these names have certain advantages over other consumer discretionary segments, including retailers.
Gambling has some key advantages over other discretionary sectors: 1) no inventory/gross margin risk, 2) no raw material/input cost risk, 3) no currency risk and 4) healthier balance sheets compared to pre-COVID,” he wrote.
As for improving balance sheets, there is evidence of this in the casino industry, as a range of operators are buying back significant amounts of stock and some restart dividends that were put on hold at the start of the pandemic. of coronavirus.
Lower headcount could benefit gaming stock
One of the major gaming industry themes emerging in the wake of the coronavirus pandemic, particularly among regional operators, is improving margins.
In other words, COVID-19 has forced gaming companies to take a long look at what worked and what didn’t, especially on the non-gaming side of their business. The result was a significant increase in margins, indicating that operators were doing more with less.
As a result, investors wonder how long casino operators can maintain high margins. Kelley points out that impressive margins are sustainable because the number of gaming industry employees is lower today than it was before the pandemic.
“Our average business has 27% fewer employees at the end of 2021 compared to 2019. So we believe margin expansion is less related to reduced promotion, marketing or leveraging of unsustainable costs and more to the pure workforce,” the analyst said in his report.
Boyd and Caesars among BofA’s top gaming stock picks
In alphabetical order, Bank of America’s favorite gaming stock ideas include Boyd Gaming (NYSE:BYD), Caesars Entertainment and Penn National Gaming (NASDAQ:PENN). Based on Kelley’s price targets, this trio offers an average upside potential of almost 52%. Boyd is the only one of the group to dominate the wider market this year.
As for a recession, that would be an obvious drag on gaming stocks, but the industry could prove more durable than expected if the economy shrinks.
“The net is that we estimate a risk of around 10% on earnings before interest, taxes, depreciation and amortization (EBITDA) in a mid-term recession scenario and a loss of around 200 to 400 basis points in margins at the property level, but that’s only about 20-40% or less than half of the margin expansion gained during the pandemic,” Kelley concludes.