Gaming Industry Not Yet Feeling Recession Pinch, Says Roth Analyst

Posted on: October 18, 2022, 03:59h. 

Last updated on: October 18, 2022, 04:45h.

Recent GDP data suggest the US economy is already meeting the traditional definition of a recession — two consecutive quarters of negative growth. But if the recent Global Gaming Expo (G2E) is an accurate indication, the gaming industry isn’t yet feeling adverse effects.

Following meetings with industry management teams at G2E, Roth Capital analyst Edward Engel noted in a report that casino operators aren’t showing signs of gross gaming revenue (GGR) deterioration.  Those with footprints on the Las Vegas Strip are constructive on their outlooks for the next several quarters due to the spate of marquee events heading to the US gaming hub.

Operators and suppliers echoed sentiment from recent quarters that gaming demand remains consistent with prior months,” wrote the analyst. “This holds across regional class II and III markets, as well as the LV Strip. But there is potential for choppiness in LV Locals.”

He said the most noticeable change has been how operators are allocating capital. After several quarters of surging share buyback activity, casino companies are now focusing on paring debt due to rising interest rates.

Attractive Valuations, Bullish on Golden Entertainment

Amid recession fears, persistent inflation and soaring interest rates, gaming stocks of all stripes are being taken to task this year.

However, there are some benefits in that scenario. Those include opportunities for market participants with long-term time horizons to get involved with some gaming names that are trading at cyclical low valuations, as Engel points out.

“The LV Strip convention schedule is approaching pre-COVID levels, where SEMA in November and CES in January should lift industry results. Meanwhile, March will benefit from two weekends of March Madness on the LV Strip. Formula 1 is also a major catalyst in 4Q23, followed by the Super Bowl in 1Q24,” according to the analyst.

He rates Golden “buy” with a $55 price target, implying upside of almost 31% from today’s close.

Supplier M&A Could Perk Up in 2023

Another trend to monitor with 2023 lurking is the possibility of increased consolidation in the gaming supplier space.

That thesis was tested in August when Inspired Entertainment (NASDAQ:INSE) offered $10 a share for PlayAGS (NYSE:AGS). Those talks ultimately fell apart, but Engel believes that could set the stage for more mergers and acquisitions activity in the space next year.

“Suppliers believe 2023 can meet/exceed 2022, as the replacement cycle fully recovers, with potential upside if GGR does not weaken in a recessionary environment. M&A was another theme during the conference, particularly after INSE bid for AGS in Aug. Chatter at the conference suggests private valuations are starting to compress towards public ones, which could lead to an uptick in M&A for the group, particularly INSE,” noted the analyst.

He believes UK-based Inspired will continue mulling takeover opportunities in the US, and rates both that stock and PlayAGS “buy.”