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The Ratings Game: Casino stocks in 2023: It could come down to this region, analysts say

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As casinos try to map out the year ahead amid concerns about inflation’s impact on leisure spending, Macau’s reopening could be the biggest driver of Wall Street’s optimism on the sector’s overall results, analysts said on Wednesday.

“We believe Macau offers the best chance for positive estimate revisions in 2023,” BofA analysts said in a research note, adding that financial forecasts for casinos that do business in the global gaming hub might be too low.

However, they remained cautious on the backdrop in the U.S. and they said the pace of legalization was cooling off for online-betting platforms.

That assessment came as China moves on from roughly three years of stringent COVID-19 controls, and after a pandemic-fueled gambling boom and pent-up travel demand. Macau is a special administrative region of China.

The analysts said that a full recovery in Macau implied roughly 35% to 45% upside to their financial forecasts for casino operators Las Vegas Sands Corp.
LVS,
+5.19%

and Wynn Resorts Ltd.
WYNN,
+6.18%
,
which run resorts in the region. Their 2024 estimates assumed a full mass-market recovery there.

The BofA analysts raised their price targets on Sands to $52 from $46, and raised their price target on Wynn to $90 from $85. They trimmed their price targets on Caesars Entertainment Inc.
CZR,
+7.41%
,
NeoGames S.A.
NGMS,
+3.72%

and Penn Entertainment Inc.
PENN,
+6.46%
.

However, the analysts warned of weaker investor payouts from the casino names that do business in Macau, and called out China’s policies which have never exactly been lenient when it comes to COVID-19 or predictable when it comes to Macau.

And where estimates for Macau casinos might be too low, they said, forecasts in the U.S. might be too high, as higher prices threaten consumers’ appetite for hitting the slots or betting on sports.

“Gaming data remains resilient, including our latest room survey and card spending,” they said. “However, a few leisure cracks may be forming, and Gaming has been a big COVID winner with virtually no mean reversion on revenues or margins (yet).”

Along the Las Vegas strip, they said, revenue would benefit from easier comparisons to the beginning of 2022, when business suffered due to the rapid spread of the Omicron variant. And they called out a “strong” event calendar and a bigger return of big group bookings and conventions as other propellants for solid financial results. But they said the year-over-year comparisons for gaming revenue in 2023 would become more difficult to surpass by the middle of the year.

Outside the Strip, they said that “visitation data has been lackluster for 6+ months” at regional casinos. And they said that while forecasts call for large growth in online gaming this year and the potential for many companies to break even, they expressed reservations elsewhere.

“However, legalization pace is slowing, stocks remain expensive on any traditional measure and the industry can only rationalize costs as quickly as the most dominant players (mostly Flutter/FanDuel) will allow,” the analysts said.

In a note last month, BofA analysts said demand for booking time at ski resorts and mountain lodging resorts has waned, they said, and noted that JetBlue Airways Corp.
JBLU,
+9.23%

and luxury vacation service Inspirato have cited weaker demand.

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