Regional Casino Stocks Attractive on Valuation, Says Raymond James

Regional casino stocks have had a difficult start to 2024, but some analysts see a value opportunity in the marginalized sector.

Boyd Gaming (NYSE: BYD) and Penn Entertainment (NASDAQ: PENN) were covered by Raymond James analyst RJ Milligan in a recent note to investors. Milligan gave both companies "outperform" recommendations and cited "compelling valuations." With a loss of 11.74% so far this year, Boyd is the best of the three, highlighting how poorly those stocks have done this year.

Boyd gave two reasons for the "tough start to the year" during the first-quarter earnings conference call last month: "increased competitive pressures in the Las Vegas Locals market" and "bad weather that is a drag on its gaming venues in the Midwest and the South." Since Red Rock Resorts' (NASDAQ: RRR) Durango Casino & Resort opened in Southwest Las Vegas last December, independent local casinos in the area that compete with Boyd and Red Rock sites have increased their promotional efforts.

Although Milligan anticipates that Boyd will face more difficulties in the current quarter, he also noted that the stock appears to be a long-term value play and that the shares are priced in accordance with revised expectations for earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR).

Raymond James Is Certain About Caesars

Despite being the second-biggest operator on the Las Vegas Strip, Caesars Entertainment (NASDAQ: CZR) also has a sizable portfolio of regional casinos, which it just expanded with the opening of a casino in Nebraska.  In other words, Caesars could be vulnerable to issues in Las Vegas and in regional markets.

"While there are headwinds in both Las Vegas and the Regionals, the stocks are pricing in significantly worse fundamentals vs. reality,” observed Milligan.

Regarding Caesars, the analyst thinks the operator can reduce pressure from its two main challenges: losses in its digital gambling division and significant leverage. There is increasing agreement that the corporation can lower its debt by increasing free cash flow and possibly selling underperforming properties in some local markets.

With a $55 price objective, Milligan rates Caesars as a "strong buy," with $40 coming from the company's land-based casino operations and $15 from its internet division. A 54.3% increase from today's close is implied by that forecast.

Penn Entertainment May Redeem Itself

Penn Entertainment, which is down 36.74% so far this year, is one of the biggest busts among regional casino stocks in 2024. However, a major portion of this poor performance can be attributed to analysts' projections of higher-than-expected losses for the operator's ESPN Bet division.

According to Milligan, Penn shares are currently trading at levels last observed in May 2020, when the nation's casinos were forced to close owing to the coronavirus pandemic. According to him, the operator's internet unit might be worth anywhere from $0 to $7, while its regional land-based casino is valued at $21 per share. Even if the interactive arm is worthless, $21 is still significantly more than Penn's current closing price of $16.41.

“Based on the current share price, we believe the market is ascribing negative equity value for the interactive business and a meaningful management penalty box discount,” concluded the Raymond James analyst.