All you need to step up to the gaming table is a little extra money, and with an economy that looks like it is poised to take-off, and wages finally starting to go higher, recreation and travel looks to benefit. One of the best areas in that sector is the gaming and lodging casino stocks, which after years of so-so performance look to be perking up in a big way, and just may be one of the top sectors to own in 2018.
In a new research report from the analysts at J.P. Morgan, they remain very positive on the top gaming and lodging casino stocks, and with good reason. Years of consolidation have transformed the sector into a much leaner and meaner arena, and could be providing investors outstanding returns going forward. The analysts noted the reasons why they are positive in the research report.
We continue to see attractive upside in U.S. gaming stocks, relative to other areas of our coverage universe, given an appealing combination of (1) solid regional fundamentals, (2) ability to grow margins through more efficient marketing (a broad theme) among an increasingly rational environment, (3) still reasonable free cash flow Yields, (4) relatively high short interest, and (5) the potential for mergers and acquisitions to lift valuations further.
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The J.P. Morgan team is very bullish on five top companies, all are rated Overweight.
Boyd Gaming
This top company generated 55% of the company’s EBITDA in the south and midwest parts of the U.S. Boyd Gaming Corporation (NYSE: BYD) operates as a multi-jurisdictional gaming company. It operates through three segments: Las Vegas Locals, Downtown Las Vegas, and Midwest and South. The company owns and operates 24 gaming entertainment properties located in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana, and Mississippi.
The company also owns and operates a travel agency and a captive insurance company that underwrites travel-related insurance in Hawaii. As of December 31, 2016, Boyd operated 1,314,557 square feet of casino space, 31,006 slot machines, 656 table games, and 9,513 hotel rooms.
The company remains a favorite for Las Vegas locals, is substantially levered to the Las Vegas market (approximately 45% of segment EBITDA). The company generally targets largely locals in this market. The company’s Downtown properties also draw Hawaiian tourists. In general, Las Vegas locals performance is less impacted by weekends versus weekdays in a period than other gaming markets would be, as a substantial portion of the local economy works in hospitality.
Shareholders are paid a small 0.66% dividend. The J.P. Morgan price target is posted at $32, and the Wall Street consensus target is set at $28.07. The shares closed Monday at $30.46.
Pinnacle Entertainment
This is a smaller capitalization company that could offer investors big upside potential. Pinnacle Entertainment Inc. (NASDAQ: PNK) operates 15 casino gaming and entertainment businesses, located in Colorado, Indiana, Iowa, Louisiana, Mississippi, Missouri, Nevada and Ohio. On April 28, 2016 the former Pinnacle Entertainment closed on the $4.9 billion sale of the majority of its real estate assets to Gaming & Leisure Properties, Inc. Subsequent to that transaction, new Pinnacle was spun off in a taxable transaction.
The company posted solid third quarter results that came in ahead of many analysts estimates. In addition, the trends for the company look very positive going forward, and there remains a fair amount of merger chatter surrounding the company and other casino operators.
The J.P. Morgan price objective is $33, and that compares with the Wall Street consensus target of $29.56. The shares ended trading on Monday at $28.91.
Eldorado Resorts
This company has a diverse property portfolio, with casinos and resort stretched across the country. Eldorado Resorts Inc. (NYSE: ERI) is a gaming and hospitality company that owns and operates gaming facilities located in Ohio, Louisiana, Nevada, Pennsylvania and West Virginia. The Company’s segments are Nevada, Louisiana, Eastern and Corporate.
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Eldorado Resorts owns and operates approximately 503,000 square feet of casino space with approximately 20,000 slot machines and video lottery terminals (VLTs), over 550 table and poker games, 45 restaurants and 6,500 hotel rooms. As of December 31, 2016, the Company owned and operated various properties, including Eldorado Resort Casino Reno, Silver Legacy Resort Casino, Circus Circus Reno, Eldorado Resort Casino Shreveport, Mountaineer Casino, Racetrack & Resort, Presque Isle Downs & Casino, and Eldorado Gaming Scioto Downs.
The J.P. Morgan price objective is $31, and the consensus is posted at $30.40. The stock closed Monday at $29.65.
Red Rock Resorts
This is another company that focuses on the lucrative Las Vegas market. Red Rock Resorts Inc. (NASDAQ: RRR) is a leading casino operator, which primarily operates in the Las Vegas Locals market, while managing two Native American tribal facilities in northern California and western Michigan.
The company operates 19 casino and entertainment properties in the Las Vegas Locals market. In May 2016, Red Rock announced an agreement to acquire the Palms Hotel and Casino in Las Vegas for $312.5 million. The company’s solid presence in Las Vegas helped drive very solid third quarter results which came in above Wall Street estimates.
The J.P. Morgan price target is set at $27, and the consensus was not available. The shares closed Monday at $28.31.
MGM Resorts International
This old school company combines a very strong presence in Las Vegas, and growing clout in Macau. MGM Resorts International (NYSE: MGM) operates through two segments, Domestic Resorts and MGM China. Its casino resorts offer gaming, hotel, convention, dining, entertainment, retail, and other resort amenities. Its casino operations include various slots, table games, and race and sports book wagering. The company operates 14 wholly owned resorts in the United States; and MGM Macau resort and casino in China, as well as develops an integrated casino, hotel, and entertainment resort on the Cotai Strip, Macau.
The company also owns and operates Shadow Creek golf course, Primm Valley Golf Club, and Fallen Oak golf course. The company serves premium gaming customers; leisure and wholesale travel customers; business travelers; and group customers, including conventions, trade associations, and small meetings.
MGM Resorts also posted solid third quarter results and gave excellent fourth quarter and 2018 guidance. With some Wall Street estimates coming down some, the company looks poised to have strong revenue and free cash flow growth. Analysts are closely watching costs in China.
J.P. Morgan has a $41 price target, and the consensus is at $37.80. Shares closed Monday at $33.18.
Five outstanding stocks for investors to add to portfolios for a gaming and lodging presence. It should be noted the sector is very cyclical, and downturns in the economy tend to hit the shares harder that most. With that in mind, they all look poised for a solid end of the year run and strong 2018.
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