Wells Fargo is selectively bullish on gaming and casino stocks.
Casino stocks have taken a hit recently, and the Dow Jones U.S. Gambling Total Stock Market Indexis down 6.6% since Sept. 7. General concerns about the Chinese economy coupled with fears over regulatory crackdowns and uncertainties surrounding a gaming law review in Macao have been major bearish catalysts for casino stocks. Wells Fargo analyst Daniel Politzer recently initiated coverage of a dozen gaming stocks and says investors need to be extremely selective, especially when it comes to Macao exposure. Instead, Politzer prefers stocks focused on Las Vegas and the U.S. online betting markets. Here are seven gaming stocks Wells Fargo recommends buying on the dip.
MGM Resorts International (ticker: MGM)
MGM Resorts is a global gaming company. Politzer estimates that Las Vegas currently accounts for about 45% of total normalized revenue, while regional U.S. casinos account for 28% and China accounts for about 23%. Politzer named MGM his top overall stock pick and says he’s bullish on the company’s high exposure to the Vegas market. The company’s BetMGM app was also second in market share in aggregate U.S. online betting in the first half of 2021, accounting for about 20% of the market. Wells Fargo has an “overweight” rating and a $55 price target for MGM stock, which closed at $43.85 on Sept. 29.
Flutter Entertainment PLC (PDYPY, FLTR.L)
Flutter Entertainment is the world’s largest bookmaker and owner of Paddy Power, BetFair and PokerStars. The company also holds a 95% ownership stake in online sports betting app FanDuel. FanDuel was the aggregate U.S. online betting leader in the first half of 2021 with a 26% market share, according to Wells Fargo. Politzer says Flutter will capture 27% of the $18.8 billion U.S. online gaming market by 2025. Flutter is also considering an independent listing of FanDuel stock in the U.S. Wells Fargo has an “overweight” rating and a $243.64 price target on the London-listed FLTR.L stock, which closed at $204.21 on Sept. 29. U.S. investors can also find Flutter trading over the counter under the symbol PDYPY.
Boyd Gaming Corp. (BYD)
Boyd Gaming is a U.S. regional casino operator with heavy exposure to Las Vegas, which Politzer estimates accounts for about 30% of its earnings. Boyd has generated impressive margin expansion in recent quarters, and Politzer says much of that expansion is sustainable given its Las Vegas business has greater than 50% margins. In addition, Boyd owns the remaining 5% of FanDuel that Flutter doesn’t own, a stake that Politzer estimates is worth about $1.3 billion. He says Boyd’s balance sheet is very healthy relative to peers. Wells Fargo has an “overweight” rating and a $92 price target for BYD stock, which closed at $64.55 on Sept. 29.
Caesars Entertainment Inc. (CZR)
Caesars Entertainment operates 44 casino and entertainment properties in 13 U.S. states. The company leases about 25 of its 44 properties. Politzer estimates Caesars’ online betting business is worth about $42 per share and should gain market share over time. Politzer says Caesars is also an excellent potential Vegas recovery play in the near term. He projects Caesars is on track to grow free cash flow to about $10 per share by 2023, which will help the company pay down debt. Wells Fargo has an “overweight” rating and a $137 price target for CZR stock, which closed at $113.40 on Sept. 29.
Churchill Downs Inc. (CHDN)
Churchill Downs is a U.S. horse racing, online gambling and regional gaming company. Politzer says the Kentucky gaming market is large and underpenetrated, creating significant growth opportunities for Churchill Downs. In addition, he says the Kentucky Derby in particular could be an economic rebound catalyst in 2022 due to pent-up event demand following the ongoing health crisis. The Churchill management team has an impressive track record of accretive capital allocation, and the company has a number of potential growth projects in its pipeline. Wells Fargo has an “overweight” rating and a $255 price target for CHDN stock, which closed at $238.58 on Sept. 29.
DraftKings Inc. (DKNG)
DraftKings is an online betting and daily fantasy sports platform. The company is second in market share behind only FanDuel in the three largest state online sports betting markets in the U.S. DraftKings is a pure play in U.S. digital gaming, which Politzer says is the most attractive growth vertical in gaming. DraftKings controls about a 17% share of the U.S. online betting market, but Politzer says it can grow that share as the company fine-tunes its products and integrates recently acquired Golden Nugget Online Gaming assets. Wells Fargo has an “overweight” rating and a $73 price target for DKNG stock, which closed at $48.32 on Sept. 29.
Red Rock Resorts Inc. (RRR)
Red Rock Resorts owns 10 gaming and entertainment facilities and 10 smaller casinos in the greater Las Vegas area. Politzer says Red Rock’s recent uptick in margins should prove sustainable as the Vegas market recovers and Red Rock’s nongaming revenues rebound. He estimates the company’s Durango casino development is worth about $4 per share and says the company’s valuable acreage creates opportunity for additional development catalysts down the road. Red Rock is the only Las Vegas casino pure-play investment, making it a potentially attractive Vegas rebound play. Wells Fargo has an “overweight” rating and a $62 price target for RRR stock, which closed at $51.89 on Sept. 29.
Best casino stocks to buy on the dip:
— MGM Resorts International (MGM)
— Flutter Entertainment PLC (PDYPY, FLTR.L)
— Boyd Gaming Corp. (BYD)
— Caesars Entertainment Inc. (CZR)
— Churchill Downs Inc. (CHDN)
— DraftKings Inc. (DKNG)
— Red Rock Resorts Inc. (RRR)
