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Why Casino Stocks Jumped Today

What happened

Shares of casino stocks had a great day on Wednesday with a number of companies jumping double digits. There was some earnings to report, but there are also market tailwinds with the S&P 500 trading 1.1% higher and the Nasdaq Composite up 2.5% today. As highly volatile stocks, it's not a shock that casino stocks are amplifying those gains today.

MGM Resorts International (NYSE: MGM) was up as much as 5.8% in early trading, Las Vegas Sands (NYSE: LVS) was up 10.5%, and Melco Resorts & Entertainment (NASDAQ: MLCO) jumped 20.5% at its peak. At 3:15 p.m. ET shares of the three stocks were up 4.3%, 10%, and 19.8% respectively.

Image source: Getty Images.

So what

Melco's results weren't particularly strong given its presence in Asia, which was under a number of travel restrictions in the fourth quarter. Revenue was actually down 9% to $480.6 million and operating loss was $104.4 million.

On the plus side, adjusted property earnings before interest, taxes, depreciation, and amortization (EBITDA), which is a proxy for cash flow coming from casinos, was $94 million, showing that cost reductions have helped cash flow even though revenue is weak.

This continues a trend casino companies across the industry are seeing, where costs were reduced during the pandemic to levels that made it possible to survive with much lower revenue. Now that revenue is improving, costs aren't coming up at the same rate, so margins and income are better than they were two years ago.

In Macao, and Asia generally, travel restrictions have lasted much longer than they have in the U.S. So, while the U.S. is about nine months into record gambling revenue, Macau is still well below 2019 gambling levels. But there are some signs of light as Hong Kong's outbreak subsides and countries start to open up travel internationally.

As bullish as some lifted restrictions are, it's possible that China remains under restrictions for years, limiting Macao's biggest source of revenue. I think that will weigh on the recovery there, but the market isn't too worried about that today.

Now what

Today's move isn't really a game changer for Asia's gambling stocks and I have more questions than answers around when a real recovery is going to happen. The omicron outbreak in Hong Kong caused a lockdown there and China is imposing new lockdowns as the virus spreads there as well. If this means investors are in for years of on-and-off lockdowns it will be tough for tourism and gambling to recover in Macao, the Philippines, and Singapore.

That said, there's a lot of upside if a recovery does happen. Casinos have cut spending and there's not a lot of capital expense that needs to happen to build out capacity. Investors are betting a recovery is on the horizon today; I'm just skeptical that we're not in for another down quarter again sometime later in 2022, which makes me more cautious on today's move.

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Travis Hoium owns MGM Resorts International. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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