This week, we use AAII’s A+ Investor Stock Grades to provide insight into three casino stocks. With states across the country legalizing sports betting, should you consider the stocks of Caesars Entertainment Inc. (CZR), MGM Resorts International (MGM) and PENN Entertainment Inc. (PENN)?
Casino Stocks Recent News
Over most of the last five years, revenue for the casino industry has grown due to a booming domestic economy and consumer spending growth. As with many industries, the coronavirus pandemic caused a decline in business. Coming out of the pandemic, there has been a notable shift in revenue growth from the U.S. toward Asia. The successful establishment of casinos in locations such as Macao and Singapore has driven revenue growth in Asian markets, far outpacing traditional U.S. casino markets like Las Vegas.
Growth in Asian markets will be dependent on coronavirus pandemic restrictions. If Asian countries continue to tighten restrictions — as they have in China — casino companies may not recover to pre-pandemic levels for a few years. However, there has been some optimism over the last week that China is starting to ease some of its strict coronavirus policies.
The worldwide casino-gaming market is expected to reach $50 billion in 2025, with a 4.85% compound annual growth rate (CAGR). There are two main types of casino gaming: land-based casino gaming and online casino gaming. With the legalization of sports betting in a number of U.S. states over the last few years, online sports betting has expanded significantly. Between 2022 and 2030, the global online gambling and betting market is expected to grow at a 12% CAGR.
Overall, the casino industry faces an important next few years. Volatile conditions and shifts in its key markets may continue with macroeconomic concerns and looming coronavirus restrictions. Online casino gaming and namely sports betting provides a significant opportunity for casinos. Taking advantage of the online market as U.S. states legalize sports betting will be a crucial revenue driver in the coming years.
Grading Casino Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been indicated by research and real-world investment results to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three casino stocks — Caesars Entertainment, MGM Resorts and PENN Entertainment — based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Casino Stocks
What the A+ Stock Grades Reveal
Caesars Entertainment Inc. (CZR) is a gaming and hospitality company that owns and operates gaming facilities. Its principal operating activities are reported through geographic regions and reportable segments, including West, Midwest, South, East and Central. The West segment includes Silver Legacy Resort Casino and Tropicana Laughlin Hotel and Casino. The Midwest segment includes Isle Casino Hotel Waterloo and Isle Casino Hotel Bettendorf. The South segment includes Isle Casino Racing Pompano Park, Isle of Capri Casino Hotel Lula, Horseshoe Lake Charles Hotel and Casino, Tropicana Casino Hotel Greenville and Belle of Baton Rouge Casino Hotel. The East segment includes Presque Isle Downs and Casino, Eldorado Gaming Scioto Downs and Tropicana Atlantic City Casino and Resort. The Central segment includes Tropicana Evansville Casino, Horseshoe St. Louis Casino and Grand Victoria Casino Elgin.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the Quality Grade shows that stocks with higher grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
Caesars Entertainment has a Quality Grade of C with a score of 57. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a Quality Score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its F-Score, change in total liabilities to assets and accruals to assets. Caesars Entertainment has an F-Score of 5, a change in total liabilities to assets of –12.9% and accruals to assets of –5.6%. The sector median F-Score and change in total liabilities to assets are 4 and 2.4%, respectively. However, Caesars Entertainment ranks poorly in terms of its return on invested capital and Z-Score, in the 22nd and 28th percentile, respectively.
Earnings estimate revisions offer an indication of how analysts view the short-term prospects of a firm. For example, Caesars Entertainment has an Earnings Estimate Revisions Grade of D, which is negative. The grade is based on the statistical significance of its latest two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
Caesars Entertainment reported a positive earnings surprise for third-quarter 2022 of 65.5%, and in the prior quarter reported an earnings surprise of –433.3%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has decreased from $0.187 to $0.163 per share due to one upward and one downward revision. Over the last three months, the consensus earnings estimate for full-year 2022 has decreased 0.3% from a loss of $3.379 to a loss of $3.388 per share due to one upward and one downward revision.
The company has a Value Grade of C, based on its Value Score of 44, which is average. This is derived from a price-to-book-value (P/B) ratio of 2.8 and a price-to-sales (P/S) ratio of 1.02, which rank in the 72nd and 34th percentile, respectively. Caesars Entertainment has a Growth Grade of B based on a score of 76. The company has had strong year-over-year sales increases for the last five years.
MGM Resorts International (MGM) is a holding company. The company, through its subsidiaries, owns and operates integrated casino, hotel and entertainment resorts across the U.S. and in Macao. The company segments include Las Vegas strip resorts, regional operations and MGM China. The Las Vegas strip resorts segment consists of Aria, Bellagio, MGM Grand Las Vegas (including The Signature), Mandalay Bay (including Delano and Four Seasons), The Mirage, Luxor, New York-New York (including The Park), Excalibur and Park MGM (including NoMad Las Vegas). The regional operations segment consists of MGM Grand Detroit in Detroit, Michigan; Beau Rivage in Biloxi, Mississippi; Gold Strike Tunica in Tunica, Mississippi; Borgata in Atlantic City, New Jersey; MGM National Harbor in Prince George’s County, Maryland; MGM Springfield in Springfield, Massachusetts; Empire City in Yonkers, New York; and MGM Northfield Park in Northfield Park, Ohio. MGM China consists of MGM Macao and MGM Cotai.
The company has a Value Grade of B, based on its Value Score of 67, which is considered to be good value. Higher scores indicate a more attractive stock for value investors and, thus, a better grade.
MGM Resorts’ Value Score ranking is based on several traditional valuation metrics. The company has a rank of 3 for shareholder yield, 37 for the price-to-sales ratio and 40 for the price-earnings (P/E) ratio (with the higher the rank being better for value). The company has a shareholder yield of 17.8%, a price-to-sales ratio of 1.15 and a price-earnings ratio of 12.6. The company has a ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA) of 8.2, which translates to a rank of 44.
The Value Grade is based on the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above, along with the price-to-free-cash-flow (P/FCF) ratio and price-to-book ratio. The rank is scaled to assign higher scores to stocks with the most attractive valuations and lower scores to stocks with the least attractive valuations.
MGM Resorts has a Momentum Grade of B, based on its Momentum Score of 67. This means that it is above average in terms of its weighted relative strength over the last four quarters. This score is derived from an above-average relative price strength of 8.5% in the most recent quarter, 9.9% in the second-most-recent quarter and 9.9% in the fourth-most-recent quarter, offset by a below-average relative price strength of –18.0% in the third-most-recent quarter. The scores are 76, 77, 28 and 68 sequentially from the most recent quarter. The weighted four-quarter relative price strength is 3.7%, which translates to a score of 67. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
MGM Resorts has a Quality Grade of C with a score of 60. The company ranks strongly in terms of its F-Score and buyback yield. The company has an F-Score of 8 and a buyback yield of 17.8%. The industry average buyback yield is –0.1%, well below MGM Resorts. The company ranks below the industry median for accruals to assets, return on invested capital, change in total liabilities to assets, Z-Score and gross income to assets.
PENN Entertainment Inc. (PENN), formerly Penn National Gaming Inc., is a provider of integrated entertainment, sports content and casino gaming experiences. The company operates approximately 44 properties in over 20 states, online sports betting in over 13 jurisdictions and iCasino in five under a portfolio of brands, including Hollywood Casino, L’Auberge, Barstool Sportsbook and theScore Bet. The company is also focused on a media and betting platform and an in-house iCasino content studio. Its portfolio consists of the mychoice customer loyalty program, which offers over 26 million members a set of rewards and experiences across business channels. The company’s casinos and racetracks brands include Ameristar, Argosy, Boomtown Casino Hotel and Cactus Petes Resort Casino. Its sports betting brands include Barstool Sportsbook and theScore Bet. Its hotels and resorts are located throughout North America. It has a retail gaming footprint across North America with over 50,000 slot machines and video lottery terminals.
PENN Entertainment has a Quality Grade of C with a score of 45. The company ranks poorly in terms of its return on invested capital, change in total liabilities to assets and gross income to assets. PENN Entertainment has a return on invested capital of 7.0%, a change in total liabilities to assets of 7.1% and gross income to assets of 15.7%.
PENN Entertainment has a Momentum Grade of C, based on its Momentum Score of 55. This means that it is average in terms of its weighted relative strength over the last four quarters. The weighted four-quarter relative price strength is 0.2%.
PENN Entertainment reported a positive earnings surprise for third-quarter 2022 of 90.5%, and in the prior quarter reported an earnings surprise of –72.4%. Over the last month, the consensus earnings estimate for the fourth quarter of 2022 has increased from $1.427 to $1.428 per share due to one upward and two downward revisions. Over the last month, the consensus earnings estimate for full-year 2022 has increased from $1.561 to $1.562 per share, based on one upward and two downward revisions.
The company has a Value Grade of C, based on its Value Score of 58. This is derived from an above-average price-earnings ratio of 25.1 and a below-average shareholder yield of –1.0%, which rank in the 68th and 57th percentile, respectively. PENN Entertainment has a Growth Grade of A based on a score of 85. The company has had strong sales growth over the last five years.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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