Regional casinos are facing what Deutsche Bank analyst Carlo Santarelli refers to as a “slow bleed” in gross gaming revenue (GGR), suggesting that the majority of growth for the group is coming from new locations rather than increases in same-store sales. 

After bad weather in January that deterred visitors, analysts and investors speculated the current quarter may bring better outcomes for regional casino GGR, but Santarelli warned that this expectation might not hold true.

"When looking ahead to the 2Q24 and beyond, we believe the sentiment that easier compares will manifest in an improved cadence (growth) in GGR is likely misguided to some degree,” observed the analyst. “While compares will ease in the 2Q24, we don’t necessarily expect, nor do we model, a return to growth, as we see moderating declines, though still negative comparisons.”

Although the Las Vegas Strip continues to be lively, indications suggest that elevated interest rates, persistent inflation, and various macroeconomic challenges are impacting certain gaming establishments in the Midwest and the South. Similarly, six out of the nine casinos in Atlantic City, NJ saw a decrease in profits last year as an increasing number of locals took to iGaming. 

Certain Regional Casino Figures Seem Misleading 

Among the states with gaming establishments categorized as regional casinos, only Colorado has recorded GGR growth this year, while an additional ten experienced declines of 2% or greater. 

March figures in Michigan were poor, marked by a 1.6% decrease, and it is thought that Illinois's growth was fueled by the addition of new venues like Bally’s (NYSE: BALY) and Full House Resorts’ (NASDAQ: FLL) temporary casinos, as same-store sales in that state fell by 6.7%. 

The contributions from Bally’s temporary casino in Chicago are contentious since data from the Illinois Gaming Board (IGB) shows that the facility surpassed only two other casinos in the state regarding March GGR. 

“While GGR can often mislead and lull investors into a false sense of security, we don’t believe promotional strategies have altered materially in the 1Q24,” added Santarelli. “We continue to see certain operators in certain regions acting somewhat promotional, though broadly, behavior is unchanged on a quarterly sequential basis.”

Stocks of Regional Casinos to Favor 

Santarelli indicated a preference for Boyd Gaming (NYSE: BYD), Golden Entertainment (NASDAQ: GDEN), and Red Rock Resorts (NASDAQ: RRR) among regional casino stocks. All three have a commonality: significant exposure to the Las Vegas local market. 

Among those three, only Boyd manages gaming establishments beyond the Las Vegas Valley. The firm is the biggest operator in downtown Las Vegas and possesses several favorable catalysts. 

“We believe buyside sentiment, and as such, valuations, likely beget a favorable risk reward for several names. Amongst the solely regional / drive-to operators, we continue to like BYD, given: 1) the healthy balance sheet and capital returns, 2) the LV locals exposure, 3) the growth in the LV Downtown segment, 4) the FanDuel stake, and 5) broader optionality and flexibility to drive growth through returns on investments,” concluded Santarelli.