The gambling industry is facing an uncertain future as states and countries reopen and coronavirus cases rise in the U.S. and abroad. Reopening resorts and casinos may sound like good news, but it's unlikely gamblers will travel to major resorts in droves while the virus is still a big threat.
Given this backdrop, a few companies will provide some important insights over the next few weeks. Here are the stocks I'm watching in July to give us a glimpse of the gambling industry's future.
Macau was the biggest gambling market in the world by a wide margin before COVID-19 hit, but it's seen gambling revenue decline over 93% year over year each of the last three months. June was especially bad, with revenue down 97% as travel restrictions in Asia picked up.
Wynn Resorts (NASDAQ:WYNN) isn't the biggest operator in Macau, but it may have the most riding on its recovery, given that 76% of property EBITDA (a proxy for cash flow) came from Macau in 2019. The company has invested billions in Macau, racking up $11.4 billion of debt in the process, so it needs the region to recover soon.
The problem for Macau is that Mainland China and Hong Kong, where most of its visitors come from, have placed restrictions on those returning from the region. A 14-day quarantine period in Hong Kong was recently extended to August 7 and China has restricted visas to Macau. If these restrictions begin to ease, Wynn Resorts' operations could start to recover in July and throughout 2020. But if they don't, this will be a stock that could help sink all casino stocks with exposure to Macau.
Here in the U.S., MGM Resorts (NYSE:MGM) is the stock to watch because it's a proxy for the U.S. gambling market overall. When it reports earnings, likely late this month, we'll get a good look at how much revenue has been generated in the weeks since casinos reopened in Las Vegas and across the country.
Management will also be able to give investors an update on the traffic flow into resorts and casinos throughout July. We shouldn't expect a quick recovery, but there have been early reports that casinos were busy in Las Vegas when they opened.
The U.S. gambling market will be down big this year because of the coronavirus pandemic, but MGM Resorts should give us an idea just how much it will be down for the industry, which will affect casino stocks across the board.
The merger that could go wrong
I'll also be watching the dance between Caesars Entertainment (NASDAQ:CZR) and Eldorado Resorts (NASDAQ:ERI) closely in July. The two companies said their agreement to merge would close in June, but that clearly didn't happen. The two problems are that Eldorado needs to raise funds to pay the $8.40 per share in cash considerations to close the deal, and the 0.0899 shares of Eldorado stock being added are worth less today than they were when the deal was announced a year ago.
Approvals of the merger have been moving along, with the Federal Trade Commission being the latest to give the thumbs up. But merging two highly leveraged casino companies in the middle of a pandemic may be a recipe for disaster long term. And debt investors may already be holding up this deal.
Another big month for gambling stocks
Gambling stocks are in for a rough year in 2020, but investors are looking for any indication on when a recovery is coming. If a recovery comes over the next few quarters, these three companies could be solid value stocks for long-term investors. But there's a lot of uncertainty ahead, and hopefully July will provide some answers.