Wells Fargo started off coverage on a wave of casino and gaming stocks on Tuesday.
The firm said the ability for players to drive return on invested capital and shareholder returns over time is its North Star. Given the rapid growth of online betting alternatives, analyst Trey Bowers and his team are generally negative on traditional casino companies.
“We see individual opportunities in the sector, but we believe the vast majority of forward growth, net of promotional activity, will accrue to digital. Our neutral digital gaming outlook reflects our strong growth expectation vs. competitive, regulatory, and hold-related dynamics,” wrote Bowers.
Some of the notable calls from Wells Fargo are listed below.
Wynn Resorts (WYNN) – Overweight rating
Wells Fargo believes management at Wynn Resorts (WYNN) continues to pursue a strong strategic plan to diversify away from Macau. Shares were said to be are on EBITDA as well as free cash flow, especially given a heightened level of spending related to the Al Marjan. For the Las Vegas part of the business, Wells Fargo sees no reason the Las Vegas property will not remain a share taker in the market and viewed by consumers as the top destination.
Churchill Downs (CHDN) – Overweight
Q3 results were noted to be back on track, and forward estimates on Churchill Downs (CHDN) were called conservative. “Looking ahead, we believe shares are attractive, and believe management’s strong track record backs our expectation of value creation over time. The company has optionality given full ownership of its regional assets, and we foresee solid growth ahead for its HRM properties,” advised Bowers.
Flutter Entertainment (FLUT) – Overweight
The view is that the sports betting giant is a best-in-class digital OSB/iGaming operator that provides exposure to a high-quality management team, high-growth U.S. digital markets, diverse international mkts, and free cash flow generation. “Sentiment has shifted negatively on the U.S. OSB markets given tax changes, prediction market competition, and event outcomes, but we would expect FLUT to overcome near-term hurdles and think the stock is undervalued at current levels,” read the Wells breakdown.
MGM Resorts International (MGM) – Underweight
Due to concerns around the health of the Las Vegas market and the casino operator’s reliance on Las Vegas EBITDA, Bowers and his team see MGM shares as fully valued with downside risk in the coming quarters given capital commitments in Japan, escalating rent levels, and potential for secular share loss due to digital.
PENN Entertainment (PENN) – Underweight
Wells Fargo holds a negative outlook on long-term regional gaming growth in general and does not buy into PENN’s (PENN) OpCo model. “PENN’s approach to digital has not gone according to plan. We understand the attempt to partner with widely recognized brands like ESPN and Barstool. However, the company’s pursuit of Branded OSB partners ultimately did not create value and burned significant amounts of precious cash flow,” highlighted Bowers.
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