A lot of “Best Of” lists cross my desk this time of year, most of which concentrate solely on events, trends, products, news, etc., of 2019—which, honestly, one would expect.
However, there is always an exception to any general rule. In this instance, the “exception” was provided by a note to investors from the Americas Gaming & Lodging team of analysts over at Instinet (a Nomura Company), which is led by Harry C. Curtis, who has been following the casino industry since the 1980s. What the Instinet crew did was not only recap its top picks for 2019, but offer insight as to why these same companies are likely to be top performers when 2020 comes to a close. The report concentrated on the best pick for three market designations—Macau, Las Vegas and Regional Gaming. The Instinet analysis for each of these selections follows, I apologize in advance for all the Wall Street lingo:
MACAU: Melco Resorts & Entertainment (MLCO)—Our outlook for 2020 gross gaming revenue (GGR) growth next year is a range of +1-3 percent, with tough VIP comps in 1H 2020, positive GGR growth in 2H 2020, and double-digit mass growth for the year. Judging from last month’s stock performance, as trade talks go, so go the Macau gaming stocks, which were +7-10 percent.
MLCO’s stock is up ~35 percent YTD (vs. the S&P 500 +26 percent). MLCO value drivers for 2020 include continued share gains from City of Dreams/Morpheus, upside from Studio City as visitation through the Lotus Bridge increases, and, most important, a 25 percent increase in adjusted free cash flow (FCS) to an estimated $1.73. Given these catalysts, MLCO’s ~9x forward EBITDA multiple should increase. Peers range from 12x (LVS) to ~10.5x (MGM). Our $33 target assumes a ~11.5x consolidated multiple, although there’s roughly 12 percent upside to $33 should MLCO’s multiple expand to only 1x turn.
LAS VEGAS: MGM Resorts (MGM)—2020 will likely be the strongest for Las Vegas fundamentals in several years, which should be positive for MGM. Upside in MGM to $40 is a risk/reward based on several catalysts: 1) LV RevPAR could approach 4 percent and EBITDA should increase ~7 percent, to $1.8billion in 2020, 2) Macau should continue to gain strength with EBITDA increasing 13 percent, 3) FCF (before asset sale proceeds) should top $1.2billion, and 4) MGM could use total FCF (including cash from assets sales) to reduce its float by 25 percent.
Like MLCO, MGM’s stock is also up ~35 percent YTD.
If the company does not deviate from the path of selling assets, deleveraging and returning excess cash to shareholders, there should be upside of 22 percent the next 12 months (NTM).
REGIONAL GAMING: Boyd Gaming Corporation (BYD)—BYD has increased ~44 percent YTD after a tough 2018 when companies with leverage over 4x suffered recession fear-driven multiple compression. For 2020, we expect another year of sturdy, if not stellar, EBITDA growth. The key driver, though, is the company’s leverage ratio declining to 4x, after which the board can return more cash to shareholders. Lower leverage should lift BYD’s forward EBITDA multiple to its seven-year average of 9x, or $37/share, >20 percent above its mid-December close.
Here’s hoping Instinet’s bold predictions come to be. For those who may say picking the same winners two years in a row is more “safe” than bold, I say look no further than pro football, because if this were true, than I would be expecting the Patriots and the Rams in this year’s Super Bowl.
And I’m pretty sure that is not going to happen.