The S&P 500 index is up about 9% so far in the third quarter of this year, while the consumer discretionary sector is up about 19%. Somewhat surprisingly, casino stocks, including online betting stocks, trade in line with the discretionary sector and are the second best performers in the sector. They only track the 21% improvement in the retail sector since the end of the second quarter.
In a review of gaming stock performance in the second quarter, Bank of America Global Research said the performance of the gaming industry in Las Vega exceeded even researchers’ lofty expectations. The performance of regional casino operators faced tough year-over-year comparisons and “survived”, and the operating environment for the time being remained stable. Online performance was helped by lower spending, but analysts warn the result may be due to seasonal factors.
BofA raised its price targets on three gaming stocks while leaving the ratings unchanged. Here’s a look at the three stocks that received higher price targets, along with three other casino stocks that remained unchanged.
It should be noted that July’s rise in the consumer price index was weaker than expected, putting most stocks on an upward trajectory on Wednesday.
Caesars Entertainment Inc. (NASDAQ: CZR) has a buy rating of BofA and an unchanged price target of $75. The stock has added around 28.5% to its price since July 1, and it traded down around 6% on Wednesday at around $48.80, implying a potential gain of 23.7% from to BofA’s price target.
Shaun Kelley, the BofA analyst who covers the stock, notes that further cost-cutting, among other things, could boost Caesars’ upside. On the other hand, high financial and operational leverage could weigh.
DraftKings Inc. (NASDAQ:DKNG) stock is up about 60% since July 1, more than double the increase of any other stock on this list. BofA has a neutral rating on the stock and raised its price target from $17 on Wednesday morning to $19. The stock was trading up almost 4% on Wednesday morning at around $18.60, implying a rise of around 2.2%.
Higher-than-expected growth and faster-than-expected state legalizations could increase the upside. Investors’ loss of appetite for growth stocks and slowing state legalizations are the main downside risks.
MGM Resorts International (NYSE: MGM) receives a neutral rating from BofA. The company’s $40 price target has not been changed. Since July 1, the stock has added around 20% to its price and the shares traded at around $34.50 on Wednesday morning. The implied gain based on BofA’s price target is almost 16%.
A stronger recovery in Las Vegas and its majority stake in MGM China could be levers for further growth. Downside risks include execution risk on the company’s sportsbook and iGaming and slower recoveries in Las Vegas and Macau.
Penn Entertainment Inc. (NASDAQ: PENN) has an unchanged price target of $50 from BofA to go along with a Buy rating. Neither was changed on Wednesday. The stock has added about 17.1% to its price since July 1 and traded down about 3.8% on Wednesday at around $35.40. Based on BofA’s price target, the implied upside is 41.2%.
Upside risks to Penn include securing additional casino licenses not already included in BofA’s estimates and sports betting outperformance. In contrast, a slower recovery in investor interest in growth stocks and a weaker than expected opportunity in sports betting.
Red Rocks Resorts Inc. (NASDAQ: RRR) stock got a price target increase from $38 to $40 per BofA share. The stock’s underperforming rating remained unchanged. The shares have gained around 22.7% since July 1 and traded Wednesday at around $34.70, implying a potential gain of 15.3% based on BofA’s price target.
The company faces tough revenue comparisons with year-ago gaming revenue in the second and third quarters. Red Rocks also has higher operating leverage than its competitors. On the upside are record margins which are the highest among regional businesses and strong cash flow.
Wynn Resorts Ltd. (NASDAQ: WYNN) received a price target increase from $70 to $72 from BofA analysts. The stock’s neutral rating has not been changed. Since July 1, Wynn’s shares are up around 16.2% and the stock traded down 0.3% on Wednesday morning to around $66.20, implying a potential upside of 8, 8% against BofA target price.
The main downside risks for Wynn are an unclear path to recovery from the COVID-19 pandemic, structural challenges in Macau and heightened geopolitical risk. Macau accounted for about 70% of Wynn’s pre-pandemic EBITDA, and a faster-than-expected recovery would provide significant upward momentum.
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