Low-Debt Casino Stocks May Be Rewarded

Casino stocks have generally performed poorly this year. However, investors evaluating the sector appear to be turning toward operators with less debt.

In a new report to clients, Macquarie analyst Chad Beynon says that factors such as balance sheet strength, free cash flow and refinancing risk have again become important differentiators in the gaming, lodging and entertainment sector. Among land-based casino operators, Monarch Casino & Resort meets these criteria and has gained 19% in its shares since the start of the year.

Beynon says the market has generally rewarded strong balance sheets and penalized companies with high leverage and weak interest coverage ratios. In the most indebted group are Bally's, Century Casinos and Full House Resorts, whose shares have lost significant value during the year.

High interest rates are seen as the main reason investors have refocused on debt. As the cost of variable-rate borrowing rises, refinancing maturing debt is also becoming more expensive. The fact that many casino companies lack investment-grade ratings adds to this risk.

According to Beynon, Bally's, Caesars Entertainment, Las Vegas Sands, MGM Resorts and Wynn Resorts face significant maturity clusters over the next three years. The total debt maturing within three years for these five companies is $20.5 billion.

The analysis concludes that two companies with the same leverage ratio could trade at very different valuations depending on their future capital expenditures. It notes that the market is increasingly drawing a clearer distinction between debt that naturally declines through cash flow and debt that remains structurally high due to investment requirements.