Early Warning Signs Emerging in Gaming Space, Says Analyst

Gaming stocks languished alongside the broader market in the first half of 2022, despite robust demand and strong margin growth.

Scenes from the Las Vegas Strip. Signs of weakness are emerging for gaming stocks, says an analyst. (Image: Wall Street Journal)
Now, it appears the toll of an inhospitable macroeconomic environment — one rooted in rising interest rates, sagging consumer confidence, and persistent inflation — is weighing on the casino industry. With second-quarter earnings season commencing this month, operators’ commentary could reflect not only softening demand in the latter stages of May and June, but muted expectations for the current quarter as well.
Early cracks are starting to form in broader gaming demand. While 2Q’s year-over-year gross gaming revenue (GGR) declines are tracking better than initially feared (down just ~0-1% YoY), there were signs of demand softening over the final week of May and carrying into June,” writes Roth Capital analyst Edward Engel in a note to clients today.
He adds that while June data points indicate waning demand last month, strength in April and May should offset that weakness, enabling casino operators to likely meet second-quarter earnings before interest, taxes, depreciation and amortization (EBITDA) estimates.
Broad-Based Pockets of Weakness
With consumer discretionary — the home of gaming stocks — ranking as one of 2022’s worst-performing sectors, it’s accurate to say that casino equity weakness is broad-based.

In other words, when one member of the gaming equity group coughs, the rest catch a cold, and that thesis is on display this year with disappointing share price performances seen across land-based casino companies, sportsbook operators and technology providers, among others.

While overall GGR remains solid, there’s evidence that high inflation and declining consumer confidence is weighing on certain demographics and select casino markets.
“While overall GGR remains healthy, certain markets and segments are starting to soften. Investors have been concerned with demand from lower demographics. But distributed gaming ‘route’ GGR and hyper-local casinos remained strong in May,” adds Engel. “Alternatively, non-local drive-to markets, such as Laughlin and Lake Charles, appeared more vulnerable to rising inflation/gas prices. In Las Vegas, industry commentary suggests softening trends for ‘value’ casinos, such as off-strip and downtown properties.”
Strong Free Cash Flow Expectations for Gaming Stocks
One tailwind for gaming stocks is that several companies in the industry are generating prodigious amounts of free cash flow (FCF), which is a compelling trait in the current economic climate. As Engel points out, several gaming stocks are attractive valuation and FCF-generating capabilities.
“On an EV/EBITDA basis, stocks are nearly ~2σ below 10yr averages, and much cheaper on a FCF basis alongside lower leverage and better FCF conversion than prior years. We broadly reduce our target prices to reflect slightly lower forecasts and trough multiples, but these still offer considerable upside potential,” says the Roth Capital analyst.
He says the most alluring FCF profiles in his coverage universe are Century Casinos (NASDAQ:CNTY), Full House Resorts (NASDAQ:FLL), Golden Entertainment (NASDAQ:GDEN) and Penn National Gaming (NASDAQ:PENN). The analyst has a “neutral” rating on Penn and “buy” ratings on the other three names.
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