Cosmic quarter at MGM; New name, same old Penn

“No Recession yet, just all time records,” reported Truist Securities analyst Barry Jonas of MGM Resorts International‘s 2Q22 earnings call. Better-than-ever Las Vegas Strip and regional revenues beat the pants off Wall Street‘s expectations, outweighing “weakness” in Macao, where gaming revenue is all but nonexistent, leading to a $52 million negative return on investment. CEO Bill Hornbuckle basically swore off any further capital investment in the Chinese enclave, turning his gaze toward Thailand instead. He hedged his commitment on a long-term renewal in Macao, adding, “Sports entertainment is a big push—they would love to see more of that activity case in that market—and I think we’re ideally positioned to be able to do that as well.”

Recorded Jonas, “bookings in Vegas continue to show growth in 2H:22, and are up double digits vs. 2021 in each month. [Management] did note that they would be monitoring for signs of slowing, and would pivot quickly in the event consumer demand slows.” Strip occupancy ran at 92% and is improving during the current quarter, with more rooms booked per day than ever during July. Average room rates are a lofty $225/night and climbing. International travelers are anticipated to achieve 80% of pre-pandemic levels this summer.

MGM’s regional properties, gradually being winnowed down to a handful of trophy properties (sayonara, Gold Strike Tunica), contributed $960 million, a 12% jump from 2021. “[Management] highlighted the strength of MGM’s differentiated regional portfolio, noting that its higher end properties are seeing the same strength as Las Vegas, while 2/3 of the regional consumer database had a household income over $110K,” wrote Jonas. Even that regional haul was dwarfed by the Strip, where MGM banked $2.1 billion in revenue, a 112% moonshot from last year.

Deutsche Bank analyst Carlo Santarelli called the MGM numbers “the strongest quarter to date in gaming … Macau was a challenge, as expected, but was also in line with our forecast. BetMGM net revenue came in slightly ahead of our forecast, but losses were greater than expected.” That said, he focused on Las Vegas, where $825 million in cash flow was way ahead of an anticipated $700 million, not counting The Cosmopolitan of Las Vegas, which chipped in $60 million of cash flow. 27% greater gaming revenue than 2019 drove the Vegas bus, with table game winnings vaulting 29% and slot win leaping 34% on comparable increases in coin-in. “Net-net, we believe the 2Q22 was strong and adds further credibility to the sustainability of the operational improvements MGM has made,” wrote an enthused Santarelli, who put a “buy” rating on the stock.

Big spending in Ontario and Illinois was blamed for the BetMGM red ink. “Management noted that it has largely been pleased with the iCasino market, while the sports betting side has been a bit more challenging,” but at least Internet gambling (“margin friendly”) is outperforming. “Management noted that they are running at a high single digit share in Canada since launch, but commentary on the market was relatively muted and we believe the aggregate market performance to date has been softer than expected.”

Ben Chaiken of Credit Suisse called MGM “one of our top picks, and a pillar of that is unappreciated capital return,” in reference to its $1.1 billion in stock buybacks. He added, “Vegas margins appear to be somewhat sustainable at these levels, which should drive street/buyside estimates higher in ‘22/’23.” Gaining the Cosmo and shedding The Mirage was deemed “accretive … So in the near term there are more tailwinds.” Looking ahead, Chaiken wrote, “While over a year out, we think the Nov ’23 [Formula One] race in Vegas should be a material catalyst that becomes a larger part of the MGM narrative.”

Also among the wowed was JP Morgan analyst Joseph Greff, who saw his expectations of 2Q22 overshot by 27%. “MGM’s liquidity position remains strong, ending with domestic liquidity of $6.5b, including $4.9b of cash or $12 per share and its net leverage is in a net cash positon [sic]. We note this liquidity position is after MGM’s buying back a sizable $1.1b of its shares in the 2Q22, much more than we expected. We give credit to MGM for accelerating buybacks after a large pullback.” He added, “MGM’s fundamentals remain sound and, thus far, unaffected by inflation, higher airfares, airport/flight unpleasantness, higher gas prices, a down equity market, etc.” Like Boyd Gaming and Caesars Entertainment, MGM is seeing low-end, unrated play weaken, redeemed by a comeback by Baby Boomers.

The Las Vegas event calendar caused Greff nothing but optimism, as it includes a full-scale Consumer Electronics Show, the NCAA men’s Sweet 16 and Elite 8, Formula One … and the 2024 Super Bowl. “We think the LV Strip is in a good positon [sic] as an entertainment center during the week and weekend periods and a still cost effective mid-week group and convention host.” Assuming a recession, Greff is baking a 10% gaming revenue decline, both on the Strip and regionally. He noted that he expected “its leverage to continued rebound in mid-week group/convention business in Las Vegas, a market that should benefit from increasing event activity over the next 2 years, both of which could offset, to some degree, potential consumer retrenchment.”

By the way, MGM brass probably can’t be rid of The Mirage soon enough after a fatal shooting in one of its hotel rooms. A quartet of party animals got into some kind of contretemps and settled it the American way—with gunfire. The result was one man dead and two women critically wounded.

It’s not Penn National Gaming anymore. It’s PENN Entertainment (the first and last time we will use the screaming, all-caps nomenclature), although the principal form of entertainment offered continues to be gambling. After PENN … er, Penn reported 2Q22 earnings, Greff ratcheted his cash-flow expectations incrementally higher and projected that digital revenues would offset recessionary softness in the casinos. “Presently, PENN’s fundamentals remain healthy, with July trends not showing a net degradation in consumer spending or visitation, despite a weakening macro.” Even so, he took his price target down to $41/share from $53. “We like PENN’s value for patient investors and are maintaining our Overweight rating and see too much pessimism baked into PENN (still), with decent value embedded in the shares … and a stellar liquidity profile and balance sheet position.”

Penn beat expectations with $1.6 billion in revenue and $504.5 million in cash flow. (Only its South-segment casinos were somewhat down.) Rated play is up, unrated play down. However, oldsters continue to either stay away or spend less. Greff: “Its unrated segment trends reflect conversion of non-rated players into its mychoice loyalty program.” Negative ROI in the digital sphere has been narrowed to $21 million. Ontario provided a boost, as did the addition of 97 third-party i-casino games. Atop the Jan. 1 launch of sports betting in Ohio, Penn anticipates retail sports betting in Massachusetts to go live later this year, with OSB following in 2023. There were also modest share buybacks: $167 million in the second quarter and another $55 million in July.

Santarelli called the numbers “relatively sound,” allowing for difficult year/year comparisons. Brick-and-mortar biz “continues to produce steady results, and steady margins, with elevated patron spend certainly helping drive operating leverage. Looking ahead, in the absence of a recession, we believe Consensus forecasts are too high and will moderate lower, as we believe competitive impacts are under appreciated.” He dismissed Penn’s digital product as “subscale” and unlikely to yield considerable cash flow. The Deutsche Bank analyst also felt “the topic of future competitive pressure remains absent from the discussion.” He pointed to Pennsylvania, where Hollywood Penn National is 11% lower year-to-date, thanks to satellite casinos … including one of Penn’s. “While two logical people can have a debate about the potential for a recession and the impact it could have, it is hard to debate the impact of competitive openings, on legacy assets, in regional gaming over time,” Santarelli warned.

Chaiken also sounded cautious, writing that “Forward street estimates (especially 3Q) have probably been too high following the June monthly results, so hopefully there is resetting of forward expectations after the 2Q update today. It would help if June was the go forward expectation.” He felt Penn would remain profitable despite the cost of launching sports betting in Ohio and Massachusetts. He also theorized that there is a disconnect between MyChoice members and Barstool Sports‘ target audience (“the Barstool brand does not resonate with that customer base”) but concluded that “hopefully the creative juices are flowing and they can capitalize on this underutilized opportunity.”

Unabashedly positive was Jonas of Truist Securities, who called the projection beat “solid.” As he summarized, “Momentum has continued into Q3 on both the land-based and interactive sides of the business, with digital integrations successfully completed in Ontario.” The company “highlighted strong property-level performance with little recognized slowdown from inflation/recession fears, with early Q3 trends looking promising. [Management] highlighted significant differences in macro conditions today compared to ’07/’08, with unemployment at multi-decade lows, strong wage growth nearly in-line with inflation, and steady home prices in stark contrast to conditions during the Great Recession.” And, in the event of substantial (-20%) slump in gambling revenues, Penn execs said they could always revert to Plan A: cost cuts. Penn’s regional properties have outperformed its Las Vegas ones but, given the latter (M Resort, Tropicana Las Vegas) this hardly comes as a shock.

Promotional costs have been way up in Pennsylvania lately, which management rationalized as a one-off to defend itself from new competition (some of it from Penn itself). “[Management] recognized that there could be some weakness in lower quality properties with limited amenity offerings, however noted that PENN’s portfolio mostly contains high-quality assets … [Management] reported that July trends are also looking healthy, both in gaming and non-gaming spend, with stable margins and a ramping interactive business.” Jonas was the only analyst to spotlight Penn’s cashless conversion, writing that nine Penn casinos have gone sans cash and 12 more will join them by year’s end. Company execs said “early data on cashless users are promising, with increased frequency of visitations and higher spend per visit.” There’s a trend to spark an upbeat view.

By comparison, Golden Entertainment just met Wall Street expectations, grossing $289.5 million. It reported degraded low-end play, like everyone else, but said—per JP Morgan’s Omer N. Sander—that trends were still healthy across its Nevada-heavy portfolio. Sander forecast 10% less gambling revenue and 15% lower cash flow next year. (Everyone seems resigned to a recession.) Currently, The Strat is weak spot, running at 80% occupancy midweek and overly dependent on online travel agencies, but Sander liked Golden’s “strong free cash flow generation, balance sheet optionality with a wholly owned portfolio and low leverage, and attractive valuation, even on our recession scenario.” He pointed to next year’s heavy convention and sports calendar as further cause for optimism.

Golden execs used the earnings call to indicate they were playing footsie with a Nevada asset purchase (no, we don’t have any good guesses). Slot-route revenues are up 12% but Silver State casinos (-6%) and locals play (-12%) are displaying softness. The Strat was hobbled by supply chain issues, unable to keep fully stocked with bed linens, not an issue normally raised on earnings calls. According to Santarelli, it deprived the spire of 15,000 room nights and as much as $3 million in cash flow.

He deemed the company’s results, nonetheless, to be “right down the middle,” and noted that it was pursuing slot-route opportunities in Virginia, North Carolina and Missouri “where the debate around distributed gaming remains healthy.” That’s a diplomatic way of describing it. (‘Cutthroat’ would be more like it.’) He also doesn’t think Golden would add a casino in Nevada without disposing of some non-core assets, what he called an “asset recycling effort.” He made only marginal downward adjustments of his projections for Golden, applauding it for offering “the highest free cash flow yield in our gaming operator coverage universe.”

Maryland casino revenues were flat last month against 2021, although still vastly higher than before the pandemic. MGM National Harbor led the pack with $77 million, up 7%, pursued by Maryland Live with $61.5 million but down 2%. Horseshoe Baltimore couldn’t even keep up with 2019 and was -5% compared to last year, booking $18.5 million. Ocean Downs was flat with $10.5 million, Hollywood Perryville down 14% to $7.5 million and Rocky Gap Resort slipped 1.5% to $6 million.

Scott “Woody” Butera may soon be looking for a new job. His employer, Fubo TV, has announced “a strategic review” of its sports betting business. “We have concluded that we will no longer pursue this opportunity on our own,” said Fubo. “Accordingly, our interactive wagering business is under strategic review. We are in internal and external discussions to determine the best path forward for Fubo’s gaming business and look forward to sharing more information.” The sports wagering arm of Fubo has only been in business since November. And the dominoes continue to fall …

Jottings: In case you missed it, Hard Rock International has tapped Hard Rock Atlantic City prexy Joe Lupo to head up the reinvented Mirage as soon as the transfer from MGM Resorts International closes. He will be replaced on the Boardwalk by Hard Rock A.C. General Manager Anthony Faranca at the end of the month. The move by Lupo represents a return to the Las Vegas Strip, where he once ran the Stardust sports book … Sports betting is soon to overrun Ohio. 1,000 restaurants and bars are now eligible to apply for sports-wagering kiosks. Since they already provide lottery sales and keno, they are essentially juiced in … OSB providers are piling in Wyoming. The newest is Caesars Sportsbook, joining predecessors FanDuel, DraftKings and BetMGM. Also licensed at PointsBet and Barstool Sports but they have yet to leave the launch pad … Somebody had to be the official gaming partner of the Detroit Lions and it’s going to be Soaring Eagle Casino & Resort, a two-hour drive from Ford Field. Soaring Eagle will sponsor three Lions TV shows, including the Power Hour on game days … Bally’s Corp. gave Tropicana Las Vegas a one-year stay of execution, pending the announcement of joint-redevelopment partners. The company’s projections for Chicago are aggressive: $250 million in 2026 gaming revenue, a 15.5% return on investment. More power to Bally’s if they can do it.