Regional Casino Stocks Attractive on Valuation, Says Raymond James

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It’s been a rough start to 2024 for regional casino stocks, but some analysts see valuation opportunity in the downtrodden group.

Blackjack players at Penn National’s Hollywood Casino in Pennsylvania. An analyst believes some regional casino stocks are now attractive on valuation. (Image: Penn Live)

In a new report to clients, Raymond James analyst RJ Milligan initiated coverage of Boyd Gaming (NYSE: BYD) and Penn Entertainment (NASDAQ: PENN) with “outperform” ratings, citing “compelling valuations. Underscoring how poorly those stocks have performed this year, Boyd is the best of the trio with a year-to-date loss of 11.74%.

On first-quarter earnings conference call last month, Boyd cited bad weather as a drag on its gaming venues in the Midwest and the South and “increased competitive pressures in the Las Vegas Locals market” as reasons for the “challenging start to the year.” The debut of  Red Rock Resorts’ (NASDAQ: RRR) Durango Casino & Resort in Southwest Las Vegas last December has sparked elevated promotional activity among independent Las Vegas locals casinos that compete with Boyd and Red Rock venues.

Milligan expects the current quarter will be another trying period for Boyd, but added that recalibrated earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) expectations are priced into the shares and that the stock has the makings of a long-term value play.

Raymond James Bullish on Caesars

While Caesars Entertainment (NASDAQ: CZR) is the second-largest operator on the Las Vegas Strip, it also boasts an expansive portfolio of regional casinos and recently added to that group with the launch of a Nebraska casino. In other words, Caesars could be vulnerable to issues in Las Vegas and in regional markets.

While there are headwinds in both Las Vegas and the Regionals, the stocks are pricing in significantly worse fundamentals vs. reality,” observed Milligan.

Specific to Caesars, the analyst believes the operator can alleviated pressures from two primary headwinds: high leverage and losses in its digital gaming unit. There’s growing consensus the company can reduce debt with improved free cash flow and by potentially selling lagging properties in some regional markets.

Milligan rates Caesars “strong buy” with a $55 price target of which $40 is derived from the land-based casino business and $15 from the digital unit. That forecast implies upside of 54.3% from today’s close.

Penn Entertainment Could Be Redemption Story

Down 36.74% year-to-date, Penn Entertainment is one of the clear duds among regional casino stocks in 2024, but much of that sour performance is attributable to analysts forecasting larger-than-expected losses for the operator’s ESPN Bet unit.

As Milligan noted, Penn shares currently reside at prices last seen in May 2020 when every casino in the country was closed due to the coronavirus pandemic. He said the operator’s land-based regional casino is worth $21 a share and the digital unit is worth anywhere from $0 to $7. Assuming the interactive arm is worthless, $21 is still well above Penn’s closing price of $16.41 today.

“Based on the current share price, we believe the market is ascribing negative equity value for the interactive business and a meaningful management penalty box discount,” concluded the Raymond James analyst.

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