Pair Trade? Goldman Sachs Upgrades Penn National Gaming, Downgrades Las Vegas Sands

In a report published Monday, Goldman Sachs analysts changed the ratings on two companies within the gaming sector to reflect their view of the challenges being faced by the world's biggest gaming markets - Macau and the US.

"Our stock picks are focused on companies that we think have more control over their destiny rather than companies that will simply be proxies for the markets in which they operate," the analysts elaborated.

The analysts upgraded the rating on Penn National Gaming, Inc PENN from Neutral to Buy, while raising the price target from $16 to $21.

In the report Goldman Sachs noted three new properties that are likely to boost Penn National's performance are:

1. The Plainridge casino in Massachusetts - opening late June 2015
2. The Hollywood Casino Jamul - slated to open during summer next year
3. The Tropicana casino on the Las Vegas Strip - which is being acquired by the company and the deal is expected to close at the end of this year

The analysts expect the Plainridge and Jamul projects to drive Penn National's EBITDA up 13.3 percent in 2016, and 4.5 percent in 2017. Meanwhile, the other regional casinos are unlikely to have any material unit growth to drive EBITDA. The Tropicana could add $48mn to EBITDA.

"We expect PENN will be the master of its own destiny, given its new capacity, while its peers will simply be proxies for the regional casino market, reliant on only “same-store” growth. We view that this growth disparity should lead to relative multiple expansion," the analysts added.

The analysts downgraded the rating on Las Vegas Sands Corp. LVS from Buy to Neutral, while reducing the price target from $60 to $52.

In the report Goldman Sachs noted the factors contributing to the downgrade as:

1. Las Vegas Sands' significant exposure to a challenging market - "LVS currently has the largest market share in Macau in terms of EBITDA, and the second largest in terms of tables, making it a derivative play on the broader Macau market recovery."
2. Minimal impact from new projects - "The Parisian opening late 2016 will add ~3,300 rooms to a base of ~10K, while Wynn’s rooms will increase 168% with the Wynn Palace. Our GS Hong Kong counterparts expect 5% EBITDA growth on average for LVS from 2014-18 vs. 12%/17% for WYNN/MGM respectively."
3. The “stub” Singapore/Vegas stock is not cheap.