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Bally's (NYSE:BALY) Misses Q4 Sales Targets


Full Report / February 21, 2024

Gaming, betting and entertainment company Bally's Corporation (NYSE:BALY) missed analysts' expectations in Q4 FY2023, with revenue up 6.1% year on year to $611.7 million. The company's full-year revenue guidance of $2.6 billion at the midpoint also came in 2.3% below analysts' estimates. It made a GAAP loss of $5.11 per share, improving from its loss of $5.65 per share in the same quarter last year.

Bally's (BALY) Q4 FY2023 Highlights:

  • Revenue: $611.7 million vs analyst estimates of $623.1 million (1.8% miss)
  • EPS: -$5.11 vs analyst estimates of -$0.54 (-$4.57 miss)
  • Management's revenue guidance for the upcoming financial year 2024 is $2.6 billion at the midpoint, missing analyst estimates by 2.3% and implying 6.2% growth (vs 8.6% in FY2023)
  • Free Cash Flow of $45.25 million is up from -$50.04 million in the previous quarter
  • Gross Margin (GAAP): 54.7%, down from 57% in the same quarter last year
  • Market Capitalization: $481.8 million

Headquartered in Providence, Rhode Island, Bally's Corporation (NYSE:BALY) is a diversified global casino-entertainment company that owns and manages casinos, resorts, and online gaming platforms.

Bally's Corporation provides a wide range of services and products, primarily centered around casino gaming. This includes a variety of slot machines and table games along with digital gaming and sports betting platforms. The company also offers non-gaming amenities such as hotel accommodations, dining experiences, live entertainment, and recreational facilities. Its offerings seek to provide a comprehensive entertainment experience, catering to both gaming enthusiasts and casual visitors.

The company's revenue streams are diversified across different channels. These include earnings from casino operations, hotel accommodations, food and beverage services, and online gaming platforms. Bally's business model is built on a mix of direct revenue generation from its properties and partnerships in the digital gaming sectors.

Casinos and Gaming

Casino and gaming companies that offer slot machines, Texas Hold ‘Em, Blackjack and the like can enjoy limited competition because gambling is a highly regulated industry. These companies can also enjoy healthy margins and profits-have you ever heard the phrase ‘the house always wins’? Regulation cuts both ways, however, and casino and gaming companies may face stroke-of-the-pen risk that suddenly limits what they do or where they can do it. Furthermore, digitization is changing the game, pun intended. Whether it’s online poker or sports betting on your smartphone, innovation is forcing casino and gaming companies to adapt to keep up with changing consumer preferences such as being able to wager anywhere on demand.

Competitors operating in the casino-entertainment sector include Caesars Entertainment (NASDAQ:CZR), MGM Resorts (NYSE:MGM), and Wynn Resorts (NASDAQ:WYNN).

Sales Growth

A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. Bally's annualized revenue growth rate of 41.1% over the last five years was incredible for a consumer discretionary business. Bally's Total RevenueWithin consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Bally's recent history shows its momentum has slowed as its annualized revenue growth of 36.1% over the last two years is below its five-year trend.

This quarter, Bally's revenue grew 6.1% year on year to $611.7 million, missing Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 8.2% over the next 12 months, an acceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, Bally's high expenses have contributed to an average operating margin of negative 3.6%. Bally's Operating Margin (GAAP)

In Q4, Bally's generated an operating profit margin of negative 48.7%, up 30.1 percentage points year on year.

Over the next 12 months, Wall Street expects Bally's to become more profitable. Analysts are expecting the company’s LTM operating margin of 5% to rise to 10.9%.

EPS

We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable. Bally's EPS (GAAP)

Over the last five years, Bally's EPS dropped 677%, translating into 50.7% annualized declines. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends or consumer preferences. Consumer discretionary companies are particularly exposed to this, leaving a low margin of safety around the company (making the stock susceptible to large downward swings).

In Q4, Bally's reported EPS at negative $5.11, up from negative $5.65 in the same quarter a year ago. This print unfortunately missed analysts' estimates. Over the next 12 months, Wall Street expects Bally's to improve its earnings losses. Analysts are projecting its LTM EPS of negative $3.48 to advance to negative $0.54.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Over the last two years, Bally's has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.8%, subpar for a consumer discretionary business.

Bally's Free Cash Flow Margin

Bally's free cash flow came in at $45.25 million in Q4, equivalent to a 7.4% margin and up 179% year on year. Over the next year, analysts predict Bally's cash burn will increase. Their consensus estimates imply its LTM free cash flow margin of negative 1.3% will fall to negative 2.9%.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Bally's five-year average return on invested capital was 3%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Bally's ROIC over the last two years averaged 9.6 percentage point decreases each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Key Takeaways from Bally's Q4 Results

We struggled to find many strong positives in these results. Its revenue missed analysts' estimates due to worse-than-expected performance within its International Interactive (digital gaming) segment. Its operating margin and EPS also fell short of Wall Street's estimates. 

Looking ahead, Bally announced in January that it would close the Tropicana Las Vegas on April 2nd. The reason behind the close is to make space for the A's, a Major League Baseball team that is relocating to Las Vegas.

Overall, the results could have been better. The stock is flat after reporting and currently trades at $10.3 per share.

Is Now The Time?

Bally's may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Bally's, we'll be cheering from the sidelines. Although its revenue growth has been exceptional over the last five years, its declining EPS over the last five years makes it hard to trust. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its relatively low ROIC suggests it has historically struggled to find compelling business opportunities.

Bally's price-to-earnings ratio based on the next 12 months is 12.0x. While we've no doubt one can find things to like about Bally's, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $12.69 per share right before these results (compared to the current share price of $10.30).

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