Caesars, MGM Upgraded by Morgan Stanley, Bank Says ‘Demand for Vegas Is There’

Posted on: April 5, 2021, 08:02h. 

Last updated on: June 30, 2021, 09:45h.

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

In another sign that Las Vegas is on the mend, Morgan Stanley today upgraded Caesars Entertainment (NASDAQ:CZR) and MGM Resorts International (NYSE:MGM), citing strength in the largest domestic gaming hub.

Caesars MGM
Inside Caesars Palace Las Vegas pictured above. Morgan Stanley’s Thomas Allen sees signs Las Vegas is healing. (Image: Business Insider)

The bank raised its ratings on the largest Strip operators to “overweight” from “neutral.” Analyst Thomas Allen boosted his price target on Caesars stock to $113 from $92 while increasing his MGM forecast to $45 from $34. That estimate implies upside of 28 percent for the Flamingo operator, while Allen’s new MGM projection implies upside of 12.5 percent from the April 1 close.

“We visited Vegas last week and found the market is in the midst of a fast, strong recovery, with especially positive booking trends,” said the analyst in a note to clients. “We believe consensus is grossly underestimating the earnings power of companies exposed, and hence upgrade CZR and MGM to ‘overweight.’”

He also ratcheted up his 2021 earnings before interest, taxes, depreciation and amortization (EBITDA) estimates on Boyd Gaming (NYSE:BYD), Caesars, and Wynn Resorts (NASDAQ:WYNN). Allen reiterated “overweight” grades on the Orleans and Encore operators.

Signs Say Las Vegas Is Healing

The NCAA Tournament, which usually lures massive amounts of sports bettors to Sin City, and schools’ Spring Break are seen contributing to Las Vegas’ upside in March. However, those are one-off events, with little follow through on April visitation trends. But Allen sees green shoots.

“While we thought it was because of Spring Break & March Madness, numerous market participants told us their bookings were stronger than current occupancy, booking windows were extending and continued to build,” said the analyst.

While convention traffic still isn’t back to pre-pandemic levels, the Las Vegas rebound could be further hastened by increasing vaccination levels and declining case counts. That could pave the way for larger group gatherings in the back half of 2021. That also could prove instrumental in stoking upside for equities such as MGM, Caesars, and Wynn — the latter two of which have sprawling convention space that has yet to be used because of the coronavirus crisis.

“Our experience was the South Strip (CZR/MGM properties) was busier than the North Strip (WYNN/LVS properties), as the market still lacked convention visitors and had made up for it with more price sensitive, typically lower quality leisure customers,” said Allen. “However, those customers illustrated demand for Vegas is there and are spending more per visitor than they have in the past.”

Caesars, MGM Ideal Vaccine Plays

As the two largest Strip operators, MGM and Caesars make for ideal plays on rising vaccination levels, declining case counts, the possible emergence of herd immunity, and almost any other scenario that indicates the US is turning a corner in the fight against COVID-19.

The companies know this and are offering vaccines to their Las Vegas-based staffers. Investors know it, too, and that outlook is reflected in the stocks, as the Bellagio and Caesar Palace operators’ shares are up an average of 24 percent over the past 90 days — more than triple the returns of the S&P 500 over the same span.

Caesars also drew positive commentary today from JPMorgan’s Joseph Greff who reiterated an “overweight” rating on the stock with a $101 price target, up from $96.

Caesars “continues to offer attractive exposure to many (positive) themes” in the domestic gaming industry, including the Las Vegas and permanent margin improvement.