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%. In something of a surprise, casino stocks, including online betting stocks, are trading in line with the discretionary sector and are the second-best industry performer in the sector. They trail only the retail sector’s 21% improvement since the end of the second quarter.
In a review of gaming stocks’ performance in the second quarter, Bank of America Global Research commented that the gaming industry’s performance in Las Vega exceeded even the researchers’ high expectations. Performance among the regional casino operators faced tough year-over-year comparisons and “survived,” and the operating environment at the moment has stayed stable. Online performance was helped along by lower expenses, but the analysts caution that the result may have been due to seasonal factors.
BofA raised its price objectives on three gaming stocks while leaving ratings unchanged. Here is a look at the three stocks that received higher price objectives, along with three other casino stocks that were left unchanged all around.
It is worth noting that the July increase in the consumer price index was lower than expected, and that put most stocks on an upward trajectory Wednesday.
Caesars Entertainment Inc. (NASDAQ: CZR) has a Buy rating from BofA and an unchanged price objective of $75. The stock has added about 28.5% to its share price since July 1, and it traded up by about 6% Wednesday at around $48.80, implying a potential gain of 23.7% to BofA’s price objective.
Shaun Kelley, BofA’s analyst covering the stock, notes that more cost-cutting, among other things, could boost the upside for Caesars. On the downside, high financial and operating leverage could weigh.
DraftKings Inc. (NASDAQ: DKNG) stock has soared by 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 it raised its $17 price target Wednesday morning to $19. The stock was trading up nearly 4% late Wednesday morning at around $18.60, implying an upside of about 2.2%.
Higher-than-expected growth and faster-than-expected state legalizations could increase the upside. Investors’ loss of appetite for growth stocks and slower state legalizations are primary downside risks.
MGM Resorts International (NYSE: MGM) gets a Neutral rating from BofA. The company’s price objective of $40 was not changed. Since July 1, the stock has added about 20% to its price, and shares traded at around $34.50 Wednesday morning. The implied gain based on BofA’s price target is almost 16%.
A stronger recovery in Las Vegas and its majority ownership of MGM China could be the levers for additional growth. Downside risks include execution risk on the company’s sports betting and iGaming and slower recoveries in Las Vegas and Macau.
Penn Entertainment Inc. (NASDAQ: PENN) has an unchanged price objective of $50 from BofA to go with a Buy rating. Neither was changed Wednesday. The stock has added about 17.1% to its share price since July 1 and traded up about 3.8% Wednesday at around $35.40. Based on BofA’s price objective, the implied upside is 41.2%.
Penn’s upside risks include winning additional casino licenses not already included in BofA’s estimates and sports betting outperformance. On the downside are a slower recovery in investor interest in growth stocks and a smaller-than-forecast opportunity in sports betting.
Red Rocks Resorts Inc. (NASDAQ: RRR) stock got a price objective boost from $38 to $40 a share from BofA. The stock’s Underperform rating was left unchanged. The shares have gained about 22.7% since July 1 and traded Wednesday at around $34.70, implying a potential gain of 15.3% based on BofA’s price objective.
The company faces tough revenue comparisons with the prior year’s gaming revenue in the second and third quarters. Red Rocks also has higher operating leverage than its competitors. On the upside are record margins that are the highest among regional companies and solid cash flows.
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Wynn Resorts Ltd. (NASDAQ: WYNN) received a price objective boost from $70 to $72 from BofA’s analysts. The stock’s Neutral rating was not changed. Since July 1, Wynn’s shares have added about 16.2%, and the stock traded up 0.3% Wednesday morning, at around $66.20, implying a potential upside of 8.8% to BofA’s price objective.
The major downside risks for Wynn are an unclear recovery path from the COVID-19 pandemic, structural challenges in Macau and increased geopolitical risk. Macau accounted for about 70% of Wynn’s EBITDA before the pandemic, and a faster-than-expected recovery would provide a significant upside boost.
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