In a wide-ranging preview of second-quarter earnings, Truist Securities analyst Barry Jonas opined that the casino sector “continues to underperform,” adding that “investors fear an ever-looming consumer pullback,” even though gaming fundamentals continued to be solid.

In a Thursday-morning investor note, Jonas dismissed concerns about record heat in Las Vegas and the Sin City market being maxed out. He favored MGM Resorts International and Caesars Entertainment in the region.

“The Strip continues to be surprisingly resilient,” Jonas wrote, even after the Super Bowl boost. A Truist survey of Las Vegas Strip rates showed those at Caesars to be 6 percent higher and those at MGM up 10 percent. He did caution that early visibility of September room rates indicated a softening of prices.

“The wider question is around an investor concern of ‘peak Vegas’,” Jonas added. “Despite these concerns, we expect both management teams to highlight a continuing Vegas growth outlook.” Potential propellants included MGM’s Marriott partnership, changes to the Las Vegas Grand Prix and the subtraction of The Mirage and Tropicana Las Vegas from the market.

Jonas said regional casinos were doing “relatively well” after a May rebound, with June numbers tracking according to expectations. Some markets, he warned, were outperforming others: “This is notable as we recall heightened investor pessimism as April state [gross gaming revenue] data came out.”

Looking at high-end custom, the analyst believed that top-level players were compensating for weakness among lower-end, unrated ones. Discussion, instead, was being driven by merger-and-acquisition talk, especially surrounding Penn Entertainment. Jonas said “we really wouldn’t expect to see much (if any) real movement until end of year/next year—at the earliest.”

Jonas wrote that Caesars was doing worse on a state-by-state basis, “but we believe this is largely a function of management’s playbook of efficiently managing promos/margins, as opposed to anything structural/permanent.”

While he believed that Wall Street had largely written off Caesars’ growth prospects, Jonas saw it as the astute management of debt and cash flow. He expected the company to be lifted by new products in New Orleans, Nebraska and Virginia, as well as tribal joint ventures in Oklahoma. Jonas also hinted at sales of peripheral Caesars assets.

Another company on which Jonas was positive was Churchill Downs. He especially liked its prospects after bans on skill games, which he believed would enhance returns at its existing casinos.

Jonas looked for a speedy resolution of the Standard General buyout offer to Bally’s Corp., particularly now that uncertainties involving Bally’s Chicago had been resolved. He thought the Bally’s board was likely to embrace the offer and slightly less inclined to reject it and instead institute “a number of value enhancing measures.”

The acceleration of Station Casinos’ second-quarter earnings call from July 23 to July 30 portends good news, Jonas thought, as well as expansion of Durango Resort. While he felt the picture was unclear as to how much Durango was affecting other Station properties, he noted that Station stock had rallied to a five-year apex.

“After multiple soft quarters, we generally think expectations for [Boyd Gaming] are reasonable,” Jonas said of Station’s main rival. He saw upside drivers in the Las Vegas local and downtown segments, as well as from the June 6 opening of a reinvented Treasure Chest in Kenner, La.

The analyst noted that the strength of Boyd’s balance sheet had fueled talk of a Penn takeover by Boyd.

“We think the complexity of a transaction (likely involving multiple parties, requiring multiple divestitures as well as consent from landlord [Gaming & Leisure Properties]), while PENN is on the verge of releasing new ESPN Bet features … that should meaningfully improve their product, points to any deal as less likely,” at least in the near term.

Although Jonas saw a mix of upsides and downsides to a Penn/Boyd deal, he perceived almost nothing but good things from a continuation of management’s buybacks of Boyd stock.

Boyd and Station competitor Golden Entertainment “has remained challenged,” Jonas wrote. He pointed to early struggles at Atomic Golf at The Strat, “though we still see value for the longer-term opportunity at the property.”

Both igaming and online sports betting continue to be strong, the analyst reported, despite tax hikes on OSB in Illinois and a sluggish pace of legalization. DraftKings’ technology made it the leader from Truist’s viewpoint, despite the Illinois impost increase, “though at the same time investors are continually asking about other states following suit.”

The arrival of Aaron LaBerge as chief technology officer at Penn pointed to upgrades for ESPN Bet.

“Investors continue to wonder what an ESPN Bet success could look like,” Jonas mused, “and how much more investment (beyond what’s guided) it’ll take to reach.”

Still, he thought expectations for the second quarter would be muted, in light of a series of earnings misses and restatements of guidance. Pointing to news of job cuts at Penn that was broken by Legal Sports Report, Jonas thought they suggested a cost-reduction concern on management’s part.

“We see more favorable equity performance and additional deals in the cards if rates tick down and capital markets remain stable,” Jonas predicted of the REIT sector, alluding to the Bally’s/GLPI alliance announced last week. He thought the latter move a plus for other REIT deals.

Even so, he was waiting on resolution of a Vici Properties/Caesars Entertainment impasse regarding the sale of Caesars’ Indiana racinos and their possible leaseback. “We don’t think CZR will exercise the put,” Jonas forecast.

Lastly, Jonas turned to the manufacturing sector. He said recent developments such as the Everi Holdings/International Game Technology merger showed that his concerns were largely playing out.

“We like the longer-term prospects for EVRI/IGT, though don’t see material share upside minimally until after the deal has closed to integration,” he added.

Near term, Jonas thought the deal was proving to be a downside for Everi, as “some M&A friction has impacted the sales environment and new products have been slower to ramp than we initially thought.”

By contrast, IGT was looking positive for second-quarter earnings, even without a progress report on its tender for another lottery contract in Italy. He thought a hike in the price of MegaMillions tickets from $2 to $5  could add between $17 million and $50 million in cash flow.

Jonas was also upbeat on Light & Wonder, writing that demand for its products in Australia continues to mount. Other stocks liked by Jonas, without elaboration, included Gambling.com Group and Inspired Entertainment.

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