Bally’s Downgraded as Analyst Sees Mounting Macro, Regulatory Risks

Posted on: November 2, 2022, 02:27h. 

Last updated on: November 10, 2022, 02:19h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Ahead of its third-quarter earnings report on Thursday, Bally’s (NYSE: BALY) was downgraded by a sell-side analyst who cites a variety of near-term risks.

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Bally’s on the Atlantic City Boardwalk. An analyst downgraded the stock on Wednesday. (Image: Press of Atlantic City)

In a note to clients, Stifel analyst Jeffrey Stantial lowered his rating on the regional casino operator to “hold” from “buy” while paring his price target to $25 from $28. That new forecast implies upside of 8.6% from the November 1 close.

While our revised model implies a mostly inline Q3 print and FY22 guide, we see increasing macro, FX, regulatory & development risks potentially pressuring out-year estimates and keeping shares range-bound in the near-term,” wrote Stantial.

Shares of Bally’s are down 39.12% year-to-date. Currently, the company runs 15 casinos in 10 states.

Strong Dollar Could Pressure Bally’s Results

The casino operator acquired UK-based online gaming firm Gamesys for $2.7 billion last year, which amounts to the buyer’s largest purchase to date.

At that time, analysts lauded the deal because it plugged gaps in Bally’s product portfolio while giving it a ready-made platform to push further into the fast-growing iGaming space. The deal also added geographic diversification to Bally’s revenue stream. But the risk to that thesis is on display this year, owing to the strong US dollar.

Due to the Federal Reserve’s six interest rate hikes in 2022, the greenback is one of the best-performing major currencies in the world. As such, the profits generated in British pounds (GBP)  by Gamesys are worth less when converted into US dollars.

“As we approach Q3 earnings, we see potential for foreign currency volatility to continue weighing on estimates & sentiment. BALY’s International Interactive business is predominately denominated in GBP, followed by Yen, with some Euro-denominated costs. We estimate every 1% decline in GBP:USD implies a ~$2M adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) headwind, while every 1% decline in EUR:USD implies a ~$0.7M benefit,” added Stantial.

The analyst added that the UK’s uncertain macroeconomic environment could pinch Bally’s shares over the near term.

“While recent commentary has been encouraging, the economic situation in the UK remains dynamic, with the ‘cost of living crisis’ still far from solved. Hence, we could see volatility pick back up for BALY’s relatively lower staking player base,” he noted.

Bally’s Long-Term Outlook Bright

While analysts and investors fret about macro and currency issues and the operator’s spending plans, including the $1.7 billion Chicago integrated resort, Stantial maintains that Bally’s long-term outlook is attractive.

In May, Chicago Mayor Lori Lightfoot selected Bally’s as the winning bidder in the city’s casino competition. The first casino in the third-largest US metro area will be built northwest of the city’s downtown Loop district.

“Our long-term constructive thesis remains intact (unique N.A. online approach; free cash flow generative International Interactive ops; high return on investment B&M growth CAPEX), though we feel a more cautious view is prudent for the time being in light of near-term risks with positive catalysts biased longer-term,” concluded the analyst.