Perhaps no annual investor forecast in recent memory has been as dominated by the overall economic outlook as it is today.
The questions of whether there will be a recession, how long and deep it would be and the depth and length of the inflationary cycle are of continuous debate.
However, consensus seems to be forming that an economic contraction of some degree is coming in 2023. That raises the question of how a recession would affect gaming investments. A deep recession will slam the industry. It is consumer discretionary, after all.
However, if a recession is shallow, or if the economy manages a soft landing, gaming can cope and maybe even thrive, at least relative to the overall market. Even in a severe recession, innovative companies will blossom. There are always winners.
Finally, it should be noted that gaming companies are on much firmer ground than in the last major downturn. Margins are up and debt is down.
Here is our look into 2023:
• Economy. There will be a slowdown or recession. The signs are there. They aren’t yet in gaming revenue or visitor statistics, and certainly not in the bullish commentary of CEOs, but they are there.
Covid relief money has long been paid out and mostly spent. Credit card debt is rising rapidly and at some point must stop.
Anecdotal reports also belie the outward CEO bullishness. Casino executives admit to a softening among lower-tier customers. Some supplier executives quietly say that casino companies are turning cautious on capital spending plans.
• Las Vegas Strip (CZR, WYNN). The conventional view is that regional casinos will outperform Las Vegas in a recession. That might not happen in 2023.
Las Vegas will benefit from powerful positive forces that should offset otherwise soft consumer spending. The major events calendar will be the city’s strongest ever. International travel is rebounding as Covid restrictions have eased. Convention business, recovering in 2021 and 2022, should fully resume in 2023, helping offset any recession-dampened corporate travel budgets.
Given its modest valuation and management’s history of execution, we think Caesars is best positioned to grow its stock price, followed by Wynn Resorts.
• Las Vegas locals and Downtown (GDEN, RRR). As goes the Strip, so goes the locals market, further fed by population growth.
Our favorite based on low valuations, the solidity of its business and the quality of its leadership remains Golden Entertainment. The stock has been trying for impatient investors in the past year, but it remains an extraordinary combination of value and growth.
Speaking of the long term, Red Rock Resorts has a simple and powerful growth strategy and a history of operational excellence.
• Regional markets (CHDN, BYD, MCRI, PENN, FLL) will be more economically sensitive than Las Vegas, but, as in past recessions, will muddle through as gaming has its eternal allure and casinos know how to offer affordable entertainment.
The regional sector is populated by some of the industry’s best companies. Churchill Downs owns its growth story as it incrementally adds capacity every year. Boyd Gaming might be the best-balanced operator. Monarch Casino might be the best run. Penn Entertainment might be the most visionary, leading the way from sports betting to cashless gaming.
But if you are looking for a home run, it is Full House Resorts. From the opening of its temporary casino in Waukegan, Illinois to the debut of Chamonix, Cripple Creek, Colorado’s first resort-quality casino, the company is about to undergo a transformation that will grow its EBITDA several fold.
• Macau (LVS). As many readers know, I recently abandoned my long-time bearishness on Macau as travel, thus gaming, will return to more normal levels as Covid restrictions drop. Also, as hostile to gaming as the Chinese government is, it doesn’t want the Macau economy to collapse.
However, the recent spike in Macau casino stocks suggests investors may be ignoring the political realities of the national government’s policies and diving back in as though the all-clear has been sounded.
Here’s our take: Business will bound back strongly but will never return to peak levels, no less grow fabulously beyond them as was once widely believed.
Macau gamers are a trading opportunity, not a long-term investment.
Obviously, the U.S.-listed company with the most to gain or lose is Las Vegas Sands, which very much needs to diversify geographically.
• OSB/iGaming (FLTR, DKNG, MGM, ENT, CZR, PENN, SRAD, GENI, CTM, BETCO). The frenetic growth in sports betting and iGaming is ending. There will still be new jurisdictions and companies will still develop markets, but crazy-fast growth is past.
The slowing of revenue growth might actually be welcomed by investors as companies will be forced to focus on profitability.
• Suppliers (IGT, LNW, ALL.AX, AGI.AX, AGS, INSE, EVRI). Gaming technology companies have gotten their houses in order in recent years, whether through divestment such as Light & Wonder or internal reorganization such as IGT. They also have gotten debt under control.
Looking forward, we expect IGT and Light & Wonder to benefit from their new focus, and for Aristocrat to continue its remarkable success.
Investors looking for home runs in 2023 might turn to small fry, such as AGS and Inspired Entertainment. AGS has gotten its house in order and has a super cheap valuation. The stock could rise nicely simply by achieving industry valuations.
Inspired has a growth engine in industry-leading virtual sports that can capitalize on the explosion in sports betting, iGaming and eTables.
Finally, Everi is riding its own waves—an ever-growing games product line and cashless gaming. Cashless is a product that can grow in a recession as casinos see it both aiding revenue generation and cutting costs.
• REITs (GLPI, VICI). If Ben Franklin were alive today, he would add gaming REITs to death and taxes as the certainties of this world.
In a time when the economy might head south, Gaming and Leisure Properties and VICI Properties offer security and substantial dividends. If their tenants paid rents when casinos were shut down by Covid, rest assured they will pay them during a recession.
Indeed, a recession could even benefit them if companies decide to sell their real estate to get through troubled times.