Bally’s Downgraded as Analyst Sees Investment Cycle Trying Investor Patience

Posted on: February 28, 2022, 08:47h. 

Last updated on: February 28, 2022, 10:14h.

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

Shares of Bally’s (NYSE:BALY) are trading lower to start the week after an analyst downgraded the casino operator.

Bally's downgrade
Bally’s on the Atlantic City Boardwalk, seen above. An analyst downgraded the stock today. (Image: Bally’s)

In a note to clients today, Jefferies analyst David Katz lowered his rating on the Rhode Island-based gaming company to “hold” from “buy,” while cutting his price target on the stock to $38 from $54, implying only modest upside from current levels. He cites an increasingly familiar reason for the downgrade: Investors’ growing concern regarding the timeline to profitability in the digital gaming and online sports betting spaces.

Our rating change to Hold from Buy is not driven by the quarter but by the change in the market’s patience for digital gaming profitability and Bally’s anticipated protracted investment cycle in land-based gaming,” writes Katz.

The gaming company reported fourth-quarter results last week, missing on both the top and bottom lines. Its international interactive unit posted quarter-over-quarter earnings before interest, taxes, depreciation and amortization (EBITDA), while it’s North American digital arm lost money.

Why $38 Price Target Matters

The $38 price forecast Katz now has on Bally’s implies upside of just 4.8% from the Feb. 25 close. But that estimate is significant.

That’s the per-share takeover offer the gaming company received last month from Standard General. The hedge fund is led by Bally’s Chairman Soo Kim and is the company’s largest shareholder. While analysts believe that offer could increase, a higher bid hasn’t been publicly revealed as of yet. As such, Katz says that offer “tethers the shares to approximate current levels.”

Bally’s formed a special committee to evaluate the acquisition proposal, and last week, it revealed that it hired an investment bank and law firm to mull the offer, “as well as any potential strategic alternatives to the proposal.”

Kim previously said Standard General will not pursue the deal unless it’s approved by the special committee.

Bally’s Investments

Katz is correct in stating that Bally’s has looming investments to make in online sports wagering and brick-and-mortar casinos.

On the land-based casino side of the business, Bally’s currently runs 14 gaming venues in 10 states — many of which are in need of enhancements. Those include the operator’s namesake property on the Atlantic City Boardwalk and the Tropicana on the Las Vegas Strip.

The Bally Bet mobile sports wagering app is currently live in Arizona, Colorado, Iowa, Indiana, and Virginia. While it’s nearing its debut in the lucrative New York market, the operator has been to slow rollout that offering, as highlighted by the fact that sports betting is live and legal in 30 states and Washington, DC.