Deutsche Bank's 2017 Regional Gaming Outlook: Boyd Is Top Pick

Deutsche Bank said Boyd Gaming Corporation BYD is its top pick in the regional gaming space and downgraded MGM Growth Properties LLC MGP to Hold from Buy, as part of its 2017 outlook for the sector.

“Given favorable pertinent macro-economic indicators and the potential for policy-related boosts to the regional gaming consumer, we are favorably biased towards the regional operators as we head into 2017,” analyst Carlo Santarelli wrote in a note.

Ratings, Justifications

Santarelli believes Boyd Gaming is best positioned for margin expansion, as the company is in the early stages of an overall cost rationalization program and margins remain well below peak in key regions.

On other hand, the analyst has moved to the sidelines on MGM on expectations of further rise in rates and limited expansion in valuation multiple. Santarelli, who cut the price target by $1 to $27, believes Gaming and Leisure Properties Inc GLPI offers a better risk/reward balance. That said, the analyst trimmed the price target of Gaming and Leisure shares by $4 to $36.

Price Targets

However, Santarelli raised his price targets on the shares of Boyd Gaming, Penn National Gaming, Inc PENN, Pinnacle Entertainment Inc PNK and Red Rock Resorts Inc RRR to $25/$18/$16/$28 from $23/$17/$13/$26, respectively.

The analyst attributed the price target increases to “1) steady, though not overwhelming, top line performance, 2) margin expansion opportunities for most, & 3) what we expect will be another year of M&A activity that further supports trading multiples.”

Equity Value In The Space

Meanwhile, Santarelli has pointed out improvements in balance sheets of regional gaming operators, with lower capex needs. This, in turn, creates equity value via deleverage or increased M&A.

The brokerage estimates that about $8.7 billion of M&A activity took place in 2016, the highest transaction volume result since 2008.

“We believe, if nothing else, policy changes around corporate tax rates and, more notably, increasing interest rates, are likely to change the dynamics of negotiations between willing buyers and reluctant sellers at this stage,” Santarelli added.

At Last Check

• Boyd shares were up 3.11 percent at $20.24.
• Gaming and Leisure was up 0.52 percent at $30.86.
• MGM Growth Properties was down 0.16 percent at $24.56.
• Pinnacle shares were up 1.57 percent at $14.60.
• Red Rock Resorts were up 0.09 percent at $23.20.