Morgan Stanley has a new top gaming pick with 20% upside

Morgan Stanley has a new top gaming pick with 20% upside
Credit: © Reuters.

Analysts at Morgan Stanley have a new top pick in the gaming sector which is based on a recovering Macau gaming market post-COVID. That new top pick is Las Vegas Sands (NYSE: LVS ).

"We are designating LVS as our Top Pick as we see it being the best way to play Macau and one of the final consumer recovery stories coming out of Covid," the analysts commented in a research report Friday. "LVS historically has catered primarily to the mass market leader with ~25% market share pre-covid and expect that share to improve over time as it invested $2B across two Macau properties during the pandemic. LVS’s other major property in Singapore continues to generate positive trends while also boasting a pristine balance sheet (<1x 2024 Net Debt/EBITDA) and ~$6.5B of cash at the end of 1Q23".

In addition, the analysts see near-term catalysts for LVS from a dividend resumption/buyback announcement along with a potential downstate New York casino license.

They note that Macau's gross gaming revenue (GGR) maintains its upward momentum, as the GGR for June reaches approximately 65% of the levels seen in 2019. It is anticipated that the mass GGR will eventually recover to the levels observed in 2019 at some point in the second half of the year. In terms of capitalizing on the mass market, LVS is viewed as the most favorable option. The recovery thus far has been fueled by the growth of premium mass, and despite having a lower focus on these customers, LVS has managed to increase its market share in the mass market, surpassing the levels seen before the COVID-19 pandemic. This positive trend is expected to benefit LVS in the future.

The firm set a new price target of $71 for LVS, suggesting 20% upside from current levels. They note shares of LVS trade at 12.8x 2024e EV/EBITDA, below its pre-pandemic average, and rate shares at Overweight.

In addition to LVS, the firm likes sports-betting platform DraftKings (NASDAQ: DKNG ) into second-quarter results as "[p]rofitability is finally upon us." They rate shares of DraftKings an Overweight with a raised price target of $40.

"We believe 2Q will be the first quarter DKNG reports a quarterly profit, generating ~ $40m of Adj. EBITDA (vs. break-even guidance) after DKNG & the industry put up strong hold during April/May (~10%)," the analysts commented. "We attribute this to a combination of a continued push into higher parlay mix for customers along with consolidation among top sports brands (Fanduel, DKNG) as the "fluff" promos continue to be pulled out of market."


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