Credit Suisse jumped backed into gaming sector when analyst Cameron McKnight released research on nine companies Tuesday, providing out-perform ratings on two casino-centric real estate investment trusts and slot machine and technology developer AGS.
In its write-up, Credit Suisse said McKnight prefers domestic gaming opportunities as opposed to Macau, where there is a short-term risk concerning a Chinese slowdown in visitation. However, McKnight favors Macau’s long-term secular story.
McKnight, who joined Credit Suisse after leading Wells Fargo’s gaming research for six years, wrote in his “Initiating Coverage” report that AGS – which went public in January – has benefitted from casinos shifting away from the larger suppliers to smaller technology providers as they reinvest in their casino floors.
“AGS is relatively new to investors,” McKnight wrote, calling the Las Vegas-based company a “pure-play gaming technology company” that was created through several gaming technology mergers.
“AGS doesn’t have a large lottery or payments business like its competitors and focuses on higher-volatility casino slot designed for regular and dedicated players.”
His other outperform ratings were placed on VICI Properties, the gaming REIT created out of the Caesars Entertainment bankruptcy, and Gaming and Leisure Properties, the industry’s first gaming REIT that spun off from Penn National Gaming in 2013.
REITs own the real estate and buildings associated with a hotel or casino and lease the businesses back to an operating company in exchange for rent. REITs don’t pay taxes but are required by the IRS to return 90 percent of their profits to shareholders.
VICI owns the real estate associated with 21 Caesars Entertainment casinos and golf courses and is acquiring a Louisiana riverboat casino with Penn National Gaming.
McKnight told investors VICI has “strong growth prospects” beyond Caesars Entertainment and “potential upside to estimates with a strong acquisition pipeline.” He added that the favorable mix of Caesars properties – both in Las Vegas and regionally – offer stability and growth.
As for Gaming and Leisure Properties, the REIT now controls the land associated with 45 casinos and racetrack casinos, primarily operated by Penn National. The company has two acquisition deals in the works in partnership with Boyd Gaming Corp. and Eldorado Resorts. He said the company owns real estate in most of the major U.S. gaming markets.
McKnight said GLPI has completed or announced $6.8 billion of acquisitions in its first five years and grown its dividend per share at 4.9 percent.
“We like GLPI’s real estate, defensive dividend stream, and strong track record,” McKnight wrote. “We believe it will continue to generate acquisition, given the fragmented ownership of the gaming industry, a large number of private gaming companies and record (mergers and acquisitions) activity in 2018 following the federal tax legislation.”
McKnight gave neutral ratings to Las Vegas Sands Corp., MGM Resorts International, and Wynn Resorts, which operate casinos in both Las Vegas and Macau.
Neutral ratings were also handed out to MGM Growth Properties – the REIT created by MGM Resorts International – and gaming equipment giant International Game Technology.
The only under-perform rating McKnight gave was to gaming equipment provider Scientific Games Corp., saying the company’s leverage – more than $8.54 billion of debt – “complicates” the valuation.
He said Scientific Games has long been a “highly debated stock” in the gaming sector, adding that its dominate share on casino floors “makes it difficult to move the needle.”
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
