“If you were surprised you haven’t been paying attention.” So wrote Deutsche Bank analyst Carlo Santarelli of yesterday’s Station Casinos earnings release. He added, “it should come as no surprise that RRR reported results that were softer than our forecasts,” which were in themselves pessimistic. Station execs pointed to tough 2022 comparisons, especially in April, as well as their sports books getting cleaned out by Las Vegas Golden Knights bettors. Almost a million dollars of incremental utility costs also accounted for the miss and the latter factor should be considerably worse next quarter. Summarized Santarelli, “if you paid attention to [Boyd Gaming], you got almost exactly what you would have expected from RRR this evening.”
Non-gaming revenues, especially F&B, outperformed but were held back by poor casino performance (-4% less net revenue). The highlights of the earnings call seem to have been management touting various coming attractions. For instance, Durango Resort (above) will open on November 20 at a cost of $780 million. Also, upcoming sales announcements for the Texas Station and Fiesta Rancho burial grounds were teased. Even so, Santarelli kept a “Buy” rating on RRR stock, moving his price target up a dollar to $55/share. This was, in part, because Station “has the strongest organic growth pipeline in gaming.”
One Wall Street denizen who was more pleased by Station’s $416 million revenue haul was J.P. Morgan analyst Joseph Greff, who reported it to be 2% higher than anticipated, even if there was a cash-flow miss. He added that the Stanley Cup playoffs kept gamblers away from the casinos, which we reckon is the downside of having major-league sports in Sin City. Greff isn’t getting carried away with Durango Fever, penciling but a “modest initial contribution” next year. We think he’s being conservative.
Even moreso was Truist Securities analyst Barry Jonas, who kept a “Hold” rating on the stock, taking a wait-and-see attitude toward Durango. Station came in way (6%) below his expectations, and Jonas continues to prefer Boyd (presumably for its greater geographic exposure), in spite of seeing Station as a best-in-class operator. “Despite these headwinds, mgmt noted the promotional environment remains rational, with Vegas strip promotions not impacting Locals,” he wrote. There were other bright spots. Convention trade continues to ramp upward, and both local and national visitation was described as strong. And room rates are on the rise. The non-gaming workforce was substantially augmented, and costs for goods and services remained flat. We see far more to like than to dismiss.
We should turn it over to OSB skeptic Santarelli for a quick sense of DraftKings‘ 2Q23 results. The stock picker was impressed, writing that the company “did more than enough, with respect to the guidance outlook for 2023, to satiate investors.” Given its rather euphoric history, he added, “we believe investors will continue to view DKNG guidance as conservative, with upside expected, thereby making performance hurdles a bit more challenging than they have been. Overall, we found the results to be very strong and indicative of DKNG delivering on many of the promises they have made to the investment community.” What wowed Santarelli the most was DraftKings’ ability to grow market share while simultaneously slowing marketing expenditures.
For instance, revenue from i-casino states was up more than 70% against a 10% reduction in marketing spend. Unfortunately, this news coincided with DKNG “bucketing” its results instead of breaking them out on a state-by-state basis, as it was formerly wont to do. “Given same-store state handles have been flat to modestly down in the year to date, industry growth will be more challenged, something we believe could influence investor psyche,” Santarelli further cautioned. But although he kept the stock on “Hold,” he did jack up his price target from $24/share to $27.
Although Greff saw much to like, he found DKNG stock overvalued by several multiples. Still, “we see a path to continued increasingly efficient player growth and retention, further progress in increasing its OSB parlay mix and ensuing structural hold gains, accretive marketing, overall cost rationalizing, and iGaming market share gains– all positives, obviously.” Keeping an “Underweight” rating on the stock, he pointed to BetMGM and Caesars Sportsbook as better-valued companies. DraftKings outshot Wall Street projections for revenue, $875 million to $753 million, and produced (more importantly) positive ROI of $73 million, a first for Jason Robins‘ company. Greff predicts that ROI will seesaw between -$200 million (3Q) and +$181 million (4Q) the rest of the way.
DraftKings’ performance would have been more astounding still had it not been for a Kentucky Derby-related $30 million ROI loss, as well as $10 million lost to a recent doubling of taxes in Ohio. The company anticipates finishing the year with $3.5 billion in revenue, providing Kentucky OSB launches on time. FanDuel, be warned. DraftKings’ overall market share has increased to 35% from 27%. We have a horserace on our hands.
Undoubtedly the most memorably moment of the Bally’s Corp. earnings call was the awkward, protracted, delicious silence that followed company leaders being asked if they were going to buy back their bonds. Execs eventually muttered something noncommittal and moved on. Even with $3.5 billion in debt, Bally’s is opting for a kick-the-can-down-the-road strategy of ignoring the debt load while building and spending as fast as possible. The shibboleth of Bally’s Chicago was frequently brandished, as though it will solve all problems.
Calling Bally’s 2Q23 performance “reasonable,” Santarelli observed that only the international-interactive division delivered more than forecast, while casinos and domestic interactive lagged. He was pleased, he said, by management sticking to its previous revenue guidance. “That being said, the Casino segment fell short of forecasts, given weaker top line performance, and weaker margins. In addition, management noted that the North American Interactive segment would now lose $50-60 mm in adjusted EBITDAR in 2023, versus the $40-50 mm in losses in the prior guidance,” Santarelli continued.
Also Bally’s execs seemed surprised by $10 million in expenses related to their Pennsylvania debut and move of BallyBet to a Kambi platform, “something we would have imagined had been previously contemplated. Lastly, while the International Interactive segment performed well in the period, we cant help but question the decision to remove nearly all of the disclosure around the geographic performance within the segment. Over time, when it comes to gaming, the removal of KPI’s from reporting, tends to prove foreboding.”
The analyst predicted that Bally’s casinos would continue to struggle in Atlantic City, in Evansville and at the Tropicana Las Vegas. Offsetting this would be the opening of the temporary Chicago casino at Medinah Temple next month. And he expected to domestic-interactive performance to experience rough sledding, “with cost mitigation likely being the focal point.” Leery of that aforementioned debt load, Santarelli shaved two dollars from his price target, to $15/share, keeping a “Hold” on it. Interestingly, CEO Robeson Reeves is (sensibly) repositioning Bally’s from its obsession with sports betting, which he calls “a funnel” to Internet casinos, where the real money is to be found.
Jottings: First it was a movie, now it’s a club experience—in more ways than one. Swingers, coming to Mandalay Bay, is a planned, miniature-golf experience with no fewer than five courses. Unfortunately, it’s more than a year away … Although county commissioners could still ram it through, a proposed Cordish Gaming casino in Rockingham County is drawing stiff opposition. Admittedly, it was somewhat of a stacked deck at one recent get-together, which doubled as an opportunity for two North Carolina GOP candidates to indulge in some anti-casino posturing … A construction boom in Macao will bring 3,732 hotel rooms on line. Mostly clumped in the old part of the city, the nine hotels will include new product from Galaxy Entertainment … The racing oval at WarHorse Casino in Nebraska hasn’t even been finished and already a casino expansion is afoot, doubling the gaming floor. 900 gaming positions will be added, divided between slots and tables … U.S. hotels are averaging 73% occupancy this year, much better than that in Las Vegas. That’s the highest level since 2019. What was that about an inescapable recession?
Quote of the Day: “The Great Casino Value Proposition has been diluted almost into oblivion and the game has become one of maximizing profits at every conceivable cash register, even ones that didn’t used to exist, like the entrances to parking garages. Yes, the casinos have exhibited serious chutzpah to lean so hard into this extreme value-reducing formula, but they’ve been aided and abetted by the ignorance and/or indifference of their customers.”—casino consultant Dennis Conrad.