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We visited Vegas last week and found the mkt is in the midst of a fast, strong recovery, with especially positive booking trends. We believe consensus is grossly underestimating the earnings power of companies exposed, and hence upgrade CZR and MGM to OW, reiterate OW BYD & WYNN.
Vegas at the beginning of a strong recovery. The market was busy, even midweek. 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. 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. However, those customers illustrated demand for Vegas is there and are spending more per visitor than they have in the past.
Already seeing pricing power, especially during weekends. The market is back to running at ~95% occupancy on weekends, with the operators able to push room rates higher. Price has been a tool to drive midweek traffic, midweek occupancy is now running at 50-60% vs. Feb ~30%. Midweek room prices are down 20-30% vs. 2019 levels, but that discount seems to be improving to 10-20% now for future bookings. In the past few weeks, some of the companies have been finding success in increasing restaurant menu prices vs. pre-COVID levels, further contributing to profitability.
May into Summer should improve materially. A number of mkt participants highlighted May as when they expect current gov’t restrictions (50% capacity, 6 ft distancing) to be relieved. All eyes are on "The World of Concrete" conference on June 7-10 as the true litmus test of if the mkt can handle large scale conferences again, so all the operators and the state gov’t want to be prepared for when it comes. The convention calendar looks better for 2022 as there are big events in 2H21 that have been converted to virtual. There is a significant amount of brand new, high quality convention space in the mkt (LVCVA, CZR, WYNN) that could help drive the mkt above 2019 levels in the future. Airlines have been sequentially increasing supply to the mkt each month. Shows / entertainment should ramp up in the summer too, though some will never return.
The big risk remains that fewer attendees will show up at future conferences. Historically ~15% of CZR's room nights were convention customers and ~20% of MGM's, but they potentially drive a greater share of profitability. The concern is that with the increase of virtual/hybrid meetings, fewer people will show up to conferences. For smaller events in Vegas so far, it appears there has been very high interest with organizers figuring out ways to maximize attendees around state restrictions. Even if there is slightly higher attrition than historically, we have to remember that in 2022, there will be 18% more convention sq footage compared to YE19, while only 2% more hotel rooms, which should create hotel room compression, esp. for CZR and WYNN who have new product.
Expenses. Labor savings will be the biggest contributor to cost upside, and while the companies will need to bring back some staff as business volumes return, it may only be ~20% of the employees that have still not been hired back post COVID. Examples given of additional costs savings were: A lot of lower/mid-tier properties will no longer have room service. Across the board there were too many layers of mgmt. Procurement savings will really come through when volumes come back, illustrated in regional markets.
See significant upside to numbers, especially in 2H21/2022. In some instances, we heard bookings/gambling/hotel revs are already approaching 2019 levels, with materially lower costs. The Street, following prior downturn playbooks, is forecasting a much more gradual recovery. Notably consensus is looking for 2Q21 Vegas occupancy of just 60%, despite March appearing to be at 63-70% already and trends improving sequentially. We raise our estimates based on what we heard, and are now 14%/2% ahead of '21/22 cons Vegas revenue, which results in 28%/9% higher Vegas EBITDA. We see the most significant upside to 2Q/3Q21 EBITDA, where we are 38%/36% ahead of the Street.
CZR/MGM part of US sports betting / iGaming oligopoly. Both companies now realize the importance of being successful in this business, and are willing to spend whatever it takes. We have raised our MGM market share up to 15% from 10% to reflect their strong execution (MGM's 4Q20 sports betting / iGaming share was 17%) and value BetMGM at 17x vs. prior 15x to reflect closer to our DKNG valuation (25x). Excluding what we see as fair value for sports betting / iGaming, CZR and MGM are trading slightly below 9x and 11x '22e EBITDAR, their LT avg NTM multiples, despite the mkt re-rating and faster long-term core growth from the legalization of sports betting, so we see additional upside.
Net-net, we raise estimates and price targets, CZR/MGM join BYD/WYNN as OWs. We raise our 2021e EBITDA for BYD/CZR/MGM/WYNN by 7% on average, and 2022e by 4%, with CZR/MGM up the most as they have the highest Vegas exposure (MGM ~50%, CZR ~45%, BYD ~35%, WYNN ~30%). Given more certainty around the recovery, we increase multiples by 0.5x on avg. Our CZR price target rises to $113 from $92 based on 10x (from 9.5x) '22e EBITDA + $33 for sports betting, MGM to $45 from $34 based on 11.7x (from 11.2x) but also now giving $12/share for sports betting (vs. $7 before), WYNN to $140 from $129 based on 14x, and BYD to $66 from $60 based on 9x. We see the most attractive base case upside for CZR at 27%, helped by high leverage (9x at YE21, 6x at YE22) and higher relative Vegas exposure. We see the most realistic bull case for WYNN with 95% upside based on the company realizing its summer 2019 analyst day goal of $2.3B EBITDA in 2022.
