Casino stocks fared poorly in 2018, down 28% on a year-to-date basis. High yield casino credit fared better, returning 14 basis points (bps) in what was a challenging year for the asset class. I break down the sector into three broad components: Vegas Destination, Regional Portfolios and International.
Today, the regional gaming market is comprised of a small number of large diversified players who have been shaped by the consolidation that drove top-line growth in the industry in 2018. The key theme driving the performance of the regional operators this year was their margin enhancement as they rationalized promotions and implemented synergies. I expect these names to continue to be a defensive play going into 2019. These credits have the diversified portfolios to withstand slowing U.S. consumer-spending growth. Regional operators are not as reliant on consumers’ travel expenditures to drive traffic. They are set to continue to face minor tailwinds as more states clarify the local sports betting regulation, especially ones that require an operator to have a local presence in a state, such as in New Jersey.
Las Vegas casinos offer consumers a destination experience with a wide range of prices and different bundles of experiences. Due to the additional travel required for most visitors to Las Vegas casinos, credits in this subsector tend to be correlated with fuel prices and increased consumer discretionary-spending capabilities. Looking ahead to the first half of 2019, I am neutral on this subsector. The slowing growth of the U.S. consumer will likely lead to less destination travel and expenditure. Favorable hotel room supply-demand dynamics with no new meaningful supply and a fuller year-over-year events calendar create pockets of opportunity for names with greater exposure to higher-dollar overnight stays.
U.S. - China trade relations have put the Macau gaming stocks in the spotlight; these names present a much different consumer and macro consideration than the aforementioned. Two of the six casino operators in Macau have licenses up for renewal in 2020, with the remaining four licenses expiring in 2022. With Macau authorities having yet to announce their plans for (potential) license renewal, chatter regarding casino operators losing their Macau operations has created a lot of negative sentiment around these names. I think the possibility of these licenses not being renewed is very slim; however, the names in this subsector will likely continue to face headline risk. Weighing the slew of new attractions set to open in the first half of 2019 and the steep decline in valuations against the headline risk, most risk-reward trade-offs in this space seem unfavorable.
Regional gaming operators with diversified portfolios offer the most defensive play in the gaming sector, with some continuing positive catalysts from sports betting. Vegas operators are susceptible to reduced consumer destination travel expenditure, with some initial positive tailwinds from supply-demand dynamics. Macau operators will face headwinds as geopolitical tensions continue, and the risk-reward trade-off is not compelling in all cases.
*Regional Basket is comprised of: BYD, ERI, PENN; Vegas Basket is comprised of: WYNNLV, MGM; China Basket is comprised of: WYNNMAC. These baskets were used for illustrative purposes only.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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