It upgraded MGM, Caesars ratings claiming that Wall Street consensus is “grossly underestimating” their earnings power
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n its latest report on the gaming industry, Morgan Stanley (MS) analyzed the Las Vegas market noting that it is “in the midst of a fast, strong recovery, with especially positive booking trends.”
Equity Analyst Thomas Allen and Research Associate Alexandra Ratzker said in the report, titled “Gaming: Viva Las Vegas! Upgrade CZR and MGM to Overweight” that “consensus is grossly underestimating the earnings power of companies exposed” during the pandemic, so it decided to upgrade MGM and Caesars to overweight from equal-weight ratings.
During their visit to Vegas, Morgan Stanley analysts found the market was busy even midweek, with numerous market participants telling them their bookings were stronger than current occupancy, booking windows were extending and continued to build. The company noted that the South Strip, with Caesars and MGM properties, was busier than the North Strip (Wynn and Las Vegs Sands properties) “as the market still lacked convention visitors and had made up for it with more price sensitive, typically lower quality leisure customers. However, those customers illustrated demand for Vegas is there and are spending more per visitor than they have in the past.”
According to the report, the market is back to running at nearly 95% occupancy on weekends, with the operators able to push room rates higher, and midweek occupancy is now running at 50-60%, up from February’s nearly 30%. Companies are using price as a tool to bolster midweek traffic.
In addition, Morgan Stanley analysts expect an improvement into the summer as it said that a number of market participants highlighted May as when they expect current government restrictions, especially the 50% capacity cap and the 6 feet social distancing, to be eased. “All eyes are on ‘The World of Concrete’ conference on June 7-10 as the true litmus test of if the mkt can handle large scale conferences again, so all the operators and the state gov’t want to be prepared for when it comes.”
They added that the convention calendar looks better for 2022 as there are big events in the second half of 2021 that have been converted to virtual. The company also sees a significant amount of brand new, high quality convention space from Wynn and Caesars that could help drive the market above 2019 levels in the future. Airlines represent another positive sign as they have been increasing supply to the market each month, and shows are expected to ramp up in the summer too, according to Morgan Stanley. However, the company identifies a “big risk” in the fact that fewer attendees will show up at future conferences amid the increase of virtual/hybrid meetings.
The report further notes that “labor savings will be the biggest contributor to cost upside. As the companies need to bring back some staff given the return of business volumes, it could only be nearly 20% of the employees that have still not been hired back post-COVID 19.
Allen and Ratzker wrote that, in some instances, they heard revenues from bookings, gambling and hotel are already approaching 2019 levels, with materially lower costs. “Notably consensus is looking for 2Q21 Vegas occupancy of just 60%, despite March appearing to be at 63-70% already and trends improving sequentially. We raise our estimates based on what we heard, and are now 14%/2% ahead of ’21/22 cons Vegas revenue, which results in 28%/9% higher Vegas EBITDA.” MS said it is now ahead of Wall Street’s EBITDA consensus estimate by 38% for the second quarter and by 36% for the third quarter.
Furthermore, MS analysts said Caesars and MGM “now realize the importance of being successful” in the US sports betting and iGaming business, “and are willing to spend whatever it takes.”
