How These 5 Casino Stocks Are Handling The Coronavirus
Tuesday 7th April 2020
COVID-19 is a big gamble for casino stocks. But these five major operators may be making the right moves to weather the storm
The coronavirus from China has done serious damage to casino stocks. With coast-to-coast lockdowns, most casino properties remain closed. But there's more to the story than the temporary shutdowns. Even if things open up within a few weeks, major players may have to contend with other headwinds.
Firstly, major casino companies are highly-leveraged. That is to say, their high levels of debt give them a low margin of error. Even a minor decrease in business could have grievous material consequences. Secondly, who's to say we'll "return to normal" any time soon? It could months, even years, before gaming revenue returns to the highwater mark.
Are these factors priced into shares? Casino stock prices have tumbled precipitously since February. They have rebounded in the past two weeks, but as the outbreak develops, more downside could be on the table.
Yet, that's not to say major operators are going into Chapter 11 anytime soon. The gaming industry is taking proactive steps to ride the storm, and prepare for the gaming environment going forward.
Major casino stocks adapting to the "new normal" include:
Casino stocks face big risks. But these names could offer tremendous upside opportunity. Let's dive in, and see how COVID-19 affects these major casino stocks.
The COVID-19 outbreak couldn't have come at a worse time for Caesars Entertainment. As the gaming giant wraps up its merger with Eldorado Resorts, the outbreak's affects could lead to a repricing of the transaction.
But in terms of liquidity, what is Caesars doing to minimize cash burn while the bulk of its properties remain closed? Furloughing 90% of its employees, the company can significantly reduce costs while its casinos remain idle. Other major casino companies are taking similar action. But while the business may be able to ride the storm, what's the future upside for Caesars shares?
That remains to be seen. Analysts remain confident the Eldorado merger will go through. But as mentioned above, will the deal terms be changed? The original transaction called for $8.40 per share in cash, plus .0849 shares of ERI stock for each share of CZR stock.
Based on Eldorado stock's closing price of $10.16 per share on April 3, that equates to around 86 cents worth of ERI stock per Caesars Entertainment share. In other words, total transaction price of $9.26 per share.
Yet, the big spread between the proposed transaction price, and the April 3 closing price of CZR stock ($6.28 per share) implies uncertainty remains. Its certainty possible the cash portion could be reduced, replaced with more equity in the combined Caesars/Eldorado.
A high-risk/high-return risk arbitrage situation, Caesars stock could be an interesting idea in today's market. But do your homework before considering this opportunity.
So naturally one wonders, how's Eldorado Resorts stock doing? As mentioned above, the outbreak and its associated closures is a fly in the ointment for their pending Caesars deal.
With the value of casino properties likely affected by an extended closure, the company could wind up overpaying, unless the original deal can be renegotiated.
Meanwhile, how are Eldorado's existing properties doing? As seen from the company's investor relations page, most of their properties have closed due to COVID-19 shutdowns. But, more importantly, does the highly-leveraged casino operator have liquidity on hand to handle idle operations?
Eldorado leases many of its properties. But there's likely enough owned real estate the company can tap into if needed. Rival Penn National Gaming (NASDAQ:PENN) has recently tapped into this, so perhaps this company can do the same. Especially as its Caesars acquisition inches closer to closure.
A scrappy upstart compared to established peers like Caesars and MGM, ERI stock remains highly volatile. Shares soared as the gaming space boomed in the late 2010s, with the company's stock price skyrocketing from around $5 per share in 2015 to as high as $70.74 earlier this year.
Yet with shares down more than 80% from their high-water mark, is the current dip an opportunity? Depends on your risk appetite.
U.S.-focused casino stocks were dealt a whammy with COVID-19. But casino companies that also operate in Macau were dealt a double-whammy.
When the coronavirus outbreak first started in China, Macau (China's Vegas) gaming operations came to a halt. This hurt big players in the region, including Las Vegas Sands.
LVS stock has essentially halved since the start of 2020. But don't discount the company, or its founder and CEO, Sheldon Adelson. This company rode out the Great Recession. Chances are, the company can repeat the magic, and manage the survive the gaming industry's latest headwind.
So, what's next for the company? As this Seeking Alpha contributor recently discussed, Macau operations have re-opened. But with tourism to the Special Administrative Region drying up, it's a long road to normal in Macau. Stateside, Las Vegas Sands' substantial Vegas presence (Venetian, Palazzo) remains closed.
Yet with the company continuing to pay its U.S. workers, perhaps LVS has the liquidity to ride out the closures. With pessimism on gaming stocks sky-high, today could the time to take a contrarian position.
However, keep one caveat in mind: uncertainty abounds concerning when Vegas can reopen and things will "return to normal." It could be a while before the Strip gets back to its prior high-water mark.
Nevertheless, the added optionality of a Macau rebound could make this casino stock one to consider.
Unlike rival Caesars, MGM stock is a more straightforward bet on a Vegas rebound. The company's key properties are clustered along the Las Vegas Strip. But while their cash cows sit idle, the company likely has the liquidity to ride out the shutdowns.
According to a March 27 press release, MGM has $3.9 billion in cash and cash investments to support liquidity. Also, like Caesars, the company has "proactively managed expenses."
But how about going forward? What happens if the shutdowns extend? The company recently executed several sale/leaseback transactions of its real estate. Yet, while the bulk of its prime real estate assets have been sold/leased back, several salable properties remain. These include the company's 50% stake in the Las Vegas CityCenter development.
The gaming giant may survive COVID-19. But is MGM stock an opportunity at today's prices? Shares cratered from prices above $30 per share in early February, to as low as $5.90 per share in mid-March.
In the past few weeks, the stock has rebounded, and now trades above $10 per share. Given coronavirus uncertainty, it may pay to wait-and-see with this casino stock.
Like next-door rival Las Vegas Sands, WYNN stock faces the double-whammy of Las Vegas and Macau shutdowns. But as pessimism weighs down shares, should investors consider this a contrarian buy?
It depends. Like LVS, Wynn could see an epic rebound if both Macau and Las Vegas tourism "return to normal." But, as InvestorPlace's Tezcan Gecgil discussed April 1, it's hard to know the full extent of COVID-19's damage to the company's bottom line.
Regarding proactive steps, Wynn resorts is following a similar playbook to its peers. This includes paying its furloughed U.S. employees through May 15. This could mean big cash burn, assuming properties remain closed several weeks from now.
Yet in the case of WYNN stock, and the other casino stocks, it's all about handicapping uncertainty. If you are confident properties will re-open sooner than anticipated, today's prices could be a screaming buy. Otherwise, it may pay off to heed bearish calls, and wait for more information before taking a position.