Casino stock investors received some good news this week as early reports out of Las Vegas suggest the reopening of major casino resorts was met with strong initial demand.
However, one analyst said on Friday that Vegas still has a long road to full recovery from its shutdown.
A number of Las Vegas casinos opened their doors for the first time on June 4, and Bank of America analyst Shaun Kelley said initial demand was so strong that several operators are now opening additional properties ahead of schedule.
“At 12:01AM on June 4th, Las Vegas casinos officially reopened. From local reports and our channel checks, the demand was strong with long lines and packed flights, similar to most regional gaming markets,” Kelley wrote in a note.
Why It’s Important
Demand was so strong that Caesars Entertainment Corporation CZR has bumped up its planned opening of Harrah’s and MGM Resorts International MGM is planning to open Excalibur next week.
But while the initial surge of Vegas demand was much better than feared, Kelley said room rates will likely suffer significantly in the medium term. Kelley estimates quoted room rates on the Vegas Strip are down 36% in June and 46% in July compared to a year ago, which will negatively impact operator margins. Kelley said the cancellation of Vegas events and conferences will continue to weigh on room rates given these events drive demand for some of the Strip’s highest-priced rooms.
Even once events ramp back up, Kelley is projecting convention attendance will drop 15% in the second half of the year.
Kelley estimates Las Vegas Sands Corp. LVS will endure the smallest drops in average room rates in the near term, with average rates in June and July falling 23% and 40%, respectively. Wynn Resorts, Limited WYNN has the highest average room rates on the Strip, and Kelley estimates it will endure the largest drop in average rates. He projects 43% and 53% declines in June and July, respectively.
Strong initial demand was the first hurdle for Vegas casino stocks to overcome in the near-term. Now that the Strip is reopened, the focus will shift to room rates and margins to determine just how profitable these casino stocks can be in a sub-optimal environment.
For investors looking to play the Vegas recovery, Bank of America has the following ratings and price targets for major Las Vegas casino operators:
- Las Vegas Sands, Buy rating and $61 target.
- Wynn, Buy rating and $95 target.
- MGM Resorts, Underperform rating and $15 target.
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