With inflation disproportionally hurting those with less money, customer wealth is an important issue for casinos.
We all know that the less money you have, the more inflation hurts. And the 8.3% surge in consumer prices in the 12 months through April has left a lot of people hurting.
Wells Fargo analysts have looked at what this means for casino companies.
“We analyzed average household income (HHI) data for visitors to … U.S. casinos to gauge which operators are most exposed to the lower/middle income customer, where food/fuel/broader inflationary pressures could reduce gaming’s wallet share,” the analysts wrote in a commentary.
The companies with the strongest presence on the Las Vegas strip (the first two names below) have the highest HHIs, while the regional casinos have lower numbers.
These are the average HHIs for major casino companies, according to the analysts:
5. Penn National Gaming (PEBA) : $74,995
4. Red Rock Resorts RRR: $82,279
2. MGM Resorts (MCHVF) : $94,352
“Given their regional exposure, Penn National, Boyd, and Caesars would likely be most impacted from a slowdown among lower-income households, though we believe much of this is already reflected in valuations/share prices,” the analysts said.
Penn National shares have lost 35% year to date, Boyd has dipped 8% and Caesars has fallen 44%.
Meanwhile, both Wynn and MGM have slipped 21%.
Bullish on Red Rock
“What surprised us most was RRR, whose customers should be fairly well insulated from inflationary headwinds,” the analysts said.
“But shares are down 28% year to date, and RRR’s 8.6x 2023 estimated enterprise value-to-EBITDA is a 15% discount from historical levels.”
Red Rock stock recently traded at $40.61.
“We see about $40 as an attractive entry point for RRR, with the potential impact from a slowing at the lowest end of its database likely minimal,” the analysts said.
They estimate that Bally’s has the greatest exposure to the under $70,000 cohort, which comprises 46% of its U.S. casino revenue, followed by Penn National at 35%, Boyd at 34%, and Churchill Downs at 31%.
Wynn, MGM, Red Rock and Caesars are also on the watch list.
“[They] generate relatively less income from lower-income cohorts, given their skew toward higher-end Las Vegas Strip properties, and for Red Rock, an increasingly affluent Las Vegas locals customer,” the analysts said.
“Similarly, Penn National, Bally’s, Churchill Downs and Boyd have the greatest number of properties catering to customers with HHI levels below $70,000.
“Given that many of these are smaller/less lucrative properties, they tend to have a relatively lower revenue weighting.”