While many of the top gaming stocks have been hurt due to the slowdown in Macau revenues, others have been hurt by either different issues or an overall malaise of investor interest in the industry. A new report from JPMorgan makes the case that after first-quarter earnings, the three stocks the firm is very positive on can grind even higher the rest of this year.
With positive catalysts on the way, and sentiment on one stock way too bearish, the JPMorgan team has three outstanding gaming ideas for aggressive growth investors. All are rated Overweight.
MGM Resorts International
This old-school company combines a very strong presence in Las Vegas and growing clout in Macau. MGM Resorts International (NYSE: MGM) may be poised to perhaps break out after years of so-so trading. While it is still burdened with high debt, at least some of that debt has been refinanced at lower levels.
JPMorgan and other Wall Street analysts find MGM to have among the most favorable risk-reward, given the combination of exposure to improving trends on the Las Vegas Strip and the continuing growth in the mass market segment in Macau in the near-term, and steady balance sheet improvements and its development pipeline in the medium term.
While the Macau business fell off dramatically the last half of 2014, MGM is not as dependent on it for overall revenue. The new casino in Cotai could open as soon as this time next year, and the JPMorgan analysts see solid single-digit EBITDA growth in Las Vegas.
JPMorgan has a $25 price target on the stock, and the Thomson/First Call consensus price target is $25.28. Shares closed Thursday at $19.32.
Gaming and Leisure Properties
This stock is a very unique and interesting way to play the sector. Gaming and Leisure Properties Inc. (NASDAQ: GLPI) is a real estate investment trust (REIT) engaged in the business of acquiring, financing and owning real estate property to be leased to gaming operators in “triple net” lease arrangements, pursuant to which the tenant is responsible for all facility maintenance, insurance required in connection with the leased properties and the business conducted on the leased properties, taxes levied on or with respect to the leased properties and all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties.
The company expects to grow its portfolio by pursuing opportunities to acquire additional gaming facilities to lease to gaming operators. It also intends to diversify the corporate portfolio over time, including by acquiring properties outside the gaming industry to lease to third parties.
The JPMorgan team thinks that company’s pursuit and ultimate purchase of the properties that Pinnacle Entertainment has is a solid deal for both companies. Pinnacle currently owns 15 casinos in eight states.
Shareholders are paid an outstanding 6% distribution. The JPMorgan price target is set at $40. The consensus target is posted at $38.50, and shares closed Thursday at $36.73
Penn National Gaming
This company has just made a huge Las Vegas purchase to bolster the firm’s gaming portfolio. Penn National Gaming Inc. (NASDAQ: PENN) announced recently that it is buying the 58-year-old Tropicana Las Vegas, paying $360 million to shareholders. Private equity firm Onex spent the past four years giving the Tropicana a $200 million face-lift after buying it out of bankruptcy in 2009. In five years, the property’s losses have been cut in more than half, dropping to $19.2 million last year, according to its annual financial report.
Penn National operates 26 casinos and hotels around the country. Its other Nevada property, The M Resort, is about 12 miles from the Las Vegas Strip. The JPMorgan team thinks the addition of a prime Las Vegas property, which will be located right across the street from MGM Resort’s future 20,000-seat Las Vegas arena, which is expected to open next year, is a solid addition at a great price. They also cite the company’s huge database of some 3 million regional gaming customers.
The JPMorgan price target is set at $19, and the consensus is at $18.07. Shares closed Thursday at $16.51.
The gaming trade is somewhat contrarian, but it is a very good call in what has become a pretty rich market. All three stocks are suitable for aggressive growth accounts.