<p>Coronavirus from China has caused serious damage to the casino stock market. With shoreline closures, most casino assets remain closed. But there is more to history than the temporary suspensions. Even if things open up within a few weeks, major players may have to contend with other headwinds.
First, large casino companies are highly exploited. That is, their high debt levels give them a low margin of error. Even a small reduction in operations can have serious material consequences. Second, who is to say that we will “return to normal” anytime soon? It can take months, even years, before the gaming revenue returns to the high water mark.
Are these factors priced in shares? Share prices at the casino have fallen sharply since February. They have recovered in the last two weeks, but as the outbreak develops, more disadvantage may be on the table.
Still, that does not mean that large operators will enter Chapter 11 anytime soon. The gaming industry is taking proactive steps to weather the storm and prepare for the game environment to come.
Large casino stocks that adapt to the “new normal” include:
Caesars Entertainment (NASDAQ: CZR) Eldorado Resorts (NASDAQ: ERI) Las Vegas Sands (NYSE: LVS) MGM Resorts International (NYSE: MGM) Wynn Resorts (NASDAQ: WYNN)
Casino stocks face major risks. But these names can offer a huge upward opportunity. Let’s dive in and see how COVID-19 affects these large casino stocks.
5 casino stocks that handle Coronavirus: Caesars Entertainment (CZR)
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The COVID-19 outbreak could not have come at a worse time for Caesars Entertainment. When the gaming giant ends its merger with Eldorado Resorts, the impact of the outbreak could lead to a re-pricing of the transaction.
But in terms of liquidity, what is Caesars doing to minimize cash burns while keeping the majority of its properties closed? With 90% of its employees, the company can significantly reduce costs while casinos remain inactive. Other large casino companies are taking similar steps. But while the business may be able to ride the storm, what is the future of Caesars shares?
It remains to be seen. Analysts are still confident that the Eldorado merger will go through. But as mentioned above, will the terms of business change? The initial transaction required $ 8.40 per share in cash, plus 0.0499 shares in the ERI share for each share in the CZR share.
Based on the Eldorado share closing price of $ 10.16 per share on April 3, this equates to approximately 86 cents of the ERI share per Caesars Entertainment share. In other words, total transaction price of $ 9.26 per share.
Nevertheless, the large spread between the proposed transaction price and the closing price of the CZR share on April 3 (USD 6.28 per share) remains uncertain. It is certain that the cash portion can be reduced and replaced with more capital in the combined Caesars / Eldorado.
A high risk / high return risk arbitrage situation, Caesar’s shares can be an interesting idea in today’s market. But do your homework before considering this possibility.
Eldorado Resorts (ERI)
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So, of course, one wonders how things are going with Eldorado Resort’s stock? As mentioned above, the outbreak and associated closures an ointment to their waiting Caesar-business.
Since the value of casino homes is likely to be affected by an extended closure, the company may wind up too much, unless the original deal can be renegotiated.
In the meantime, how are Eldorado’s existing properties? As can be seen from the company’s investor relations page, most of their properties have been closed due to COVID-19 closures. But, more importantly, does the highly specific casino operator have the liquidity to handle vacancies?
Eldorado rents out many of its properties. But there are probably enough owned properties that the company can utilize if needed. Rival Penn National Gaming (NASDAQ: PENN) has recently taken advantage of this, so maybe this company can do the same. Especially when its Caesars acquisition comes closer to closing.
A scary rise compared to established peers like Caesars and MGM, the ERI stock is still very volatile. Shares increased as gaming space grew in the late 2010s, with the company’s share price rising from about $ 5 per share in 2015 to as high as $ 70.74 earlier this year.
But with stocks down more than 80% from their high water mark, is the current dip a possibility? Depends on your risk appetite.
Las Vegas Sands (LVS)
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US-focused casino exchanges got a whammy with COVID-19. But casino companies that are also active in Macau were dealt a double heel.
When koronavirusutbrottet first started in China stayed in Macau (China’s Vegas) gambling activities. This injured major players in the region, including Las Vegas Sands.
The LVS share has mainly been halved since the beginning of 2020. But do not discount the company or its founder and CEO, Sheldon Adelson. This company weathered the great recession. The chance is that the company can repeat the magic and manage to survive the gaming industry’s latest headwind.
So, what’s next for the company? As this Seeking Alpha contributor recently discussed, the Macau business has reopened. But when tourism to the particular administrative region dries out, it is a long way to normal in Macau. Stateside, Las Vegas Sands significant Vegas presence (Venetian, Palazzo) is still closed.
But as the company continues to pay its U.S. workers, LVS may have the liquidity to ride out the closures. With pessimism on gaming stocks soaring, today would be the time to take an opposite position.
But keep a caution in mind: there is uncertainty about when Vegas may reopen and things will “return to normal.” It may take a while before the strip returns to its previous high water mark.
Nevertheless, the additional option of a Macau-rebound, making this casino stock market to consider.
MGM Resorts International (MGM)
Unlike rival Caesars, the MGM share is a simpler bet on a Vegas rebound. The company’s key features are grouped along the Las Vegas Strip. But while their cash cows are idling, the company probably has the liquidity to ride out the suspensions.
According to a press release March 27, MGM has 3.9 billion US dollars in cash and cash investments to support liquidity. Like Caesars, the company has “proactively managed expenses”.
But what about moving forward? What happens if the shutdowns extend? The company recently completed several sales / returns of its properties. Nevertheless, while the majority of its main real estate assets have been sold / leased back, several salable properties remain. These include the company’s 50% stake in Las Vegas CityCenter development.
The gaming giant can survive COVID-19. But are MGM shares an option at today’s prices? Shares crashed from prices above $ 30 per share in early February, to as low as $ 5.90 per share in mid-March.
Wynn Resorts (WYNN)
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Like its next door competitor, Las Vegas Sands, WYNN shares face twice as many Las Vegas and Macau shutdowns. But since pessimism weighs down stocks, should investors consider this a controversial buy?
It depends on. Like LVS, Wynn could see an epic rebound if both Macau and Las Vegas tourism “return to normal.” But as InvestorPlace’s Tezcan Gecgil discussed on April 1, it’s hard to know the full extent of COVID – 19’s damage to the company’s results.
When it comes to proactive steps, Wynn resorts follow a similar gamebook as their peers. This includes paying their US employees through May 15. This can mean large cash burns, provided that properties remain closed for several weeks to come.
But in the case of WYNN shares and the other casino companies, it is about handicapping uncertainty. If you are convinced that real estate will reopen earlier than expected, today’s prices can be a screaming purchase. Otherwise, it may be worthwhile to listen to bearish calls and wait for more information before taking a position.
Thomas Niel, contributor to InvestorPlace, has been writing a one-share analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.