The year 2024 has gotten off to a shaky start for regional casino stocks. Nevertheless, savvy analysts, amidst the overall stock market turbulence, are identifying enticing opportunities. This opening chapter of 2024 certainly hasn’t brought much in the way of luck to Penn National’s Hollywood Casino in Pennsylvania, but astute market watchers are beginning to see reasons to bet on these undervalued stocks.
Raymond James analyst, RJ Milligan, in a recently released financial briefing to clients, has brought both Boyd Gaming and Penn Entertainment into his portfolio under the umbrella of “outperform” ratings. Milligan furnishes the reason for this bullish outlook as “compelling valuations.” Boyd Gaming, despite suffering a loss of 11.74% year-to-date, emerges as the group’s standout performer in this little-lauded sector.
In a first-quarter earnings conference held last month, Boyd Gaming leveled blame for its underwhelming performance on inclement weather negatively impacting its midwestern and southern venues. It also lamented “increased competitive pressures in the Las Vegas Locals market” as driving factors in their not-so-auspicious start to the year. The advent of Red Rock Resorts’ Durango Casino & Resort in Southwest Las Vegas last December has ignited enthusiasm and increased promotional activity among independent, local Las Vegas casinos, bringing a fresh wave of competition for Boyd and Red Rock establishments.
Milligan portends another challenging quarter for Boyd, with earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) expectations already baked into the stock. Nonetheless, he contends that the grounding of the company’s stock presents an attractive long-term value prospect, making it an enticing proposition for discerning investors.
In a further testament to his bullish outlook, Milligan holds a strong investment sentiment towards Caesars Entertainment. As the second-largest operator on the Las Vegas Strip, its wide-reaching portfolio of regional casinos, recently increased by the launch of a Nebraska casino, makes it a significant player in the industry. Milligan expresses that, while challenges are present in both the Las Vegas and regional sectors, the actual pricing of these stocks hints at far more dire circumstances than reality dictates.
Turning his attention to Caesars, Milligan argues that the entertainment giant can defuse tension from two dominating obstacles: heavy debt and loss in its digital gaming branch. He indicates that the company is in a prospective position to alleviate its debt liability with improved cash flow and by potentially offloading underperforming properties in specific regional markets.
Taking these factors into account, Milligan gives a “strong buy” rating to Caesars with a $55 price target. He approximates that $40 of this valuation stems from the land-based casino operations, while the remaining $15 is courtesy of the digital arm, indicating a potential rise of 54.3% from the current closing figure.
Meanwhile, Penn Entertainment is shaping up to be the potential redemption story of 2024. Year-to-date, it’s down by a substantial 36.74%, primarily due to analysts predicting substantial losses for the company’s ESPN Bet project. However, as Milligan points out, Penn’s shares are currently valued at prices last seen during the height of the 2020 pandemic when every casino in the country was shuttered.
Milligan evaluates the company’s land-based regional casino operation to be worth $21 per share, with the potential for the digital unit to contribute an additional $0 to $7. Even considering the digital unit as a write-off, $21 still surpasses Penn’s current closing price of $16.41, showing the potential growth of Penn.
Concluding his analysis, Milligan notes, “Based on the current share price, we believe the market is ascribing negative equity value for the interactive business and a significant management penalty box discount.” According to Milligan, the current status of the regional casino stocks presents a golden opportunity for the patient investor to place their bets.
