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U.S.-China Trade War Woes Mar Gaming Industry Prospects

Harendra Ray

The Zacks Gaming industry includes companies, which primarily own and operate integrated casino, hotel, and entertainment resorts. Some of the companies in the industry also deliver technology products as well as services across lotteries, electronic gaming machines, sports betting and interactive gaming.

Let’s take a look at the industry’s three major themes:

  • Although casino operators generated solid revenues from Macau in May and June, the second half of 2019 is likely to be impacted by the trade war between Beijing and Washington. Given the backdrop, investors have become skeptical about the gaming industry, in which the majority of companies derive business primarily from Macau, Asia’s largest gambling hub. In June, Macau gaming revenues rose 5.9% from the year-ago period, much higher than market expectations of 1-3% increase. While the metric rose 1.8% in May, the same had declined 8.3% and 0.4% in April and March, respectively. Despite the sharp gain in June, gaming revenues from the region declined nearly 0.5% in the first half of 2019. Moreover, flagging China property price impacted the high-end VIP segment. Smoking ban in the region also adversely impacted the VIP segment.
     
  • Legalization of sports betting outside Nevada has given the industry a new lease of life. The Supreme Court overturned the Professional and Amateur Sports Protection Act (PASPA) that banned sports betting outside Nevada. The scope for casino operators will grow as, illegally, the activity is valued at billions of dollars annually in the United States. Sports betting has been legalized in Delaware, Mississippi, New Jersey, New Mexico, West Virginia, Pennsylvania, Rhode Island, Montana, Indiana, Tennessee, Illinois and New Hampshire. Moreover, Connecticut, Kentucky, Michigan, Massachusetts. Maryland, Minnesota, Missouri, Kansas, Louisiana, Oklahoma, South Carolina, California, Oregon, Arizona and other states are also likely to tread the same path in the coming months.
     
  • Improving tourism in Las Vegas and rising demand for gaming and leisure will continue to drive the industry. Per a report published by Morgan Stanley on Jan 18, Las Vegas casinos will shine in 2019. Moreover, the firm suggests that investors looking to invest in casino stocks this year should look no further than Los Angeles- based casinos. Most of the companies are opting for alternative avenues to expand customer base and business. Additionally, casinos operators are collaborating with the hospitality sector, setting up luxury hotels and taking initiatives to improve gaming businesses. Since these non-gaming services generate higher margins, companies are increasingly focusing on other streams to drive revenues. Moreover, increase in millennial visitation and robust non-gaming revenues bode well for the industry.


Zacks Industry Rank Indicates Dismal Prospects

The Zacks Gaming Industry is grouped within the broader Zacks Consumer Discretionary Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. The Zacks Gaming industry currently carries a Zacks Industry Rank #150, which places it in the bottom 41% of 254 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Dec 31, 2018, the industry’s earnings estimate for the current year has gone down 16.9%.

Despite the industry’s drab near-term prospects, we present a few gaming stocks that one can still consider. But it’s worth taking a look at the industry’s shareholder return and current valuation.

Industry Lags Sector and S&P 500

The Zacks Gaming industry has lagged the broader Zacks Consumer Discretionary Sector as well as the S&P 500 Index over the past year.

The industry has declined 15.6% over this period against the S&P 500 Index’s rise of 6% and the broader sector’s increase of 3.5% in the said time frame.

One-Year Price Performance


 
Gaming Industry’s Valuation

Since gaming companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. The industry currently has a trailing 12-month EV/EBITDA ratio of 11.98, which is below the high of 22.98 in the past year and the median level of 13.13. The space looks quite pricey when compared to the market at large as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.46 and the median level is 8.48.

Over the past five years, the industry has traded as high as 24.47X, as low as 10.53X and median of 13.13X, as the chart below shows.

Enterprise Value-to EBITDA Ratio (Past 5 Years)


 
Bottom Line

Volatility in Macau gaming revenues remains a concern for the industry. Moreover, the trade war between Beijing and Washington is also an overhang. However, continued innovation, increasing use of smartphones as well as other electronic devices and online gambling bode well for the industry.

Below we have discussed four stocks with a favorable Zacks Rank. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

International Game Technology PLC (IGT): This London based company has a Zacks Rank #2 (Buy). The company has long-term earnings growth rate of 10%. The Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 9.2%.

Price and Consensus: IGT



Melco Resorts & Entertainment Limited (MLCO): This Central, Hong Kong based company has a Zacks Rank #2. The Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 15.7%. The company also has an impressive long-term earnings growth rate of 22.1%.

Price and Consensus: MLCO



PlayAGS, Inc. (AGS): This Las Vegas, NV based, Zacks Ranked #2 company has an estimated long-term earnings growth rate of 12%. The consensus estimate for 2019 earnings indicates year-over-year growth of 500%.

Price and Consensus: AGS



Zynga Inc. (ZNGA): This San Francisco, CA based company’s Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 187.5% The company, carrying a Zacks Rank #2, has an estimated long-term earnings growth rate of 15%.

Price and Consensus: ZNGA

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Zynga Inc. (ZNGA) : Free Stock Analysis Report
 
Melco Resorts & Entertainment Limited (MLCO) : Free Stock Analysis Report
 
International Game Technology (IGT) : Free Stock Analysis Report
 
PlayAGS, Inc. (AGS) : Free Stock Analysis Report
 
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