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At its peak in 2006, the Las Vegas Strip was generating $569 million in monthly gambling revenue, and the region’s casinos had never been healthier. But a wave of expansion and a pandemic in 2020 left the region in trouble. In 2020, Las Vegas averaged only $311.1 million in monthly gambling revenue, and for a period of time, the entire strip was shut down.
Casino stocks adjusted by raising money and cutting costs, but for over a year now, the question for investors has been: how long will the recovery in Las Vegas last? Companies have hinted that business should return to a more “normal” level in the fall of 2021, but we’re already seeing a jump in gambling activity. In April, the Las Vegas Strip reported $483.4 million in gambling revenue and it is likely that this will continue to rise as the number of COVID-19 infections falls and vaccination rates rise. Las Vegas may already be back and could be better than ever by the end of the year.
Image source: Getty Images.
A partial recovery so far
The recovery in Las Vegas is impressive, but not equal. Business customers, who stay during the week, have not returned in a meaningful way, but weekend consumers have returned quickly. The beginning of May, Caesars Entertainment (NASDAQ:CZR)COO Anthony Carano said the Las Vegas Strip sold out on the weekend for the foreseeable future.
It will probably take much longer for the weekday business to return. Conventions and business trips are normally scheduled months or even years in advance, so we probably won’t see the full recovery of group accommodations in Las Vegas until late 2021 or 2022.
Carano said Caesars could have better convention and group business in the future than it did in 2019, saying, “Group and convention room nights on the books for the second half of ’21 versus ’19, are up about 20% right now, and we’re are also seeing good rate growth. Group revenue on the books for 2022 is up approximately 15%.”
Wynn Resorts (NASDAQ:WYNN) CEO Matt Maddox had similar thoughts during his conference call: “The back half of ’21 is looking good, ’22 is really strong.” MGM Resorts (NYSE:MGM) CEO Bill Hornbuckle was more muted, saying, “With the larger groups expected to return at scale in ’22, our business is on par with pre-COVID levels in ’22 and ’23.”
There is a partial recovery today, the weekends are performing well, but the weekdays are still struggling. Based on management’s comments, weekday business could be extremely healthy by the end of 2021.
Would Las Vegas be better off than pre-pandemic?
The crazy thing is to think that post-pandemic Las Vegas could actually be better off than it was in 2019. But that could happen, and bullish management commentary is indicating they expect a strong recovery.
It’s hard to predict revenue and EBITDA (earnings before interest, taxes, depreciation and amortization), indicative of cash flow from Las Vegas casinos, but we can get an idea of demand by looking at room rates. I’ll use Wynn Las Vegas as an example of where room rates are going.
In 2019, Wynn Resorts’ average daily room rate (ADR) was $269 per night. That dropped to $235 in 2020, even though revenue per available room was just $70. But if we look at Wynn’s booking calendar, the rates explode.
Casino companies do not release rooms booked for future dates or rates, but we can get an idea of the booking trends based on their booking sites. For a weekday in July (Monday through Thursday), rates for a standard king room at Wynn Las Vegas range from $159 to $399 per night. Weekend nights (Friday through Sunday), which are in high demand, range from $254 to $719 per night. Looking forward to September, weekday rates range from $319 to $509 per night and weekends are $339 to $899 per night, with nearly half of weekend nights currently costing more than $800. There are also six nights in September that are completely unavailable at Wynn.
This isn’t a perfect indication of demand, and prices can depend on events and the time before a booking, but the direction of rates seems clear. The trend towards higher room rates reinforces management’s comments that demand is extremely high later in 2021, and it is possible that room rates could exceed their 2019 highs later this year. That could also translate into better sales and profitability.
Do casino stocks have more room to run?
Is it too late to get into casino stocks? The three largest publicly traded operators in Las Vegas have done well for investors over the past three years. Only Wynn Resorts is in decline, driven in part by the decline in Macau, where the company generates most of its revenue.
I think casino stocks will continue to do well as the economy recovers and people flock back to Las Vegas. Entertainment and conventions are likely to be in high demand in the coming years as consumers and businesses reconnect.
As a bonus, we might also see casino companies recover or increase dividends once cash flow starts flowing again. Casinos are actually built to be great dividend stocks because casinos require high upfront costs but generate cash for decades. And as revenue grows, there will be more left for investors, another reason to be optimistic about Las Vegas in the coming years.
This article represents the opinion of the writer, who may disagree with the official recommendation of a premium consulting service from Motley Fool. Were fur! Questioning an investment thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.
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