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- Shares of MGM and Caesars light up Monday after Morgan Stanley upgraded the companies to overweight from equal-weight ratings.
- Morgan Stanley said pricing power for Las Vegas casinos is growing stronger.
- Business activity should pick up even more through the summer if the government lifts certain COVID-19 restrictions.
- See more stories on Insider's business page.
Shares of MGM Resorts and Caesars Entertainment climbed Monday as Morgan Stanley upgraded the companies to overweight ratings as it sees Wall Street 'grossly underestimating' the earnings potential for the companies from Las Vegas' recovery from the pandemic.
Morgan Stanley said analysts visited Las Vegas last week and found that the market was at the "beginning" of a strong recovery period, wrote analyst Thomas Allen in a note raising the companies from equal-weight ratings.
The midweek period was busy. "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."
MGM shares were up 5% after popping up by as much as 7.4% to $42.63. Caesar's stock added on as much as 5.2% when it reached $93.58 then later trimmed the gain to 3.8%.
Morgan Stanley said it upwardly revised some financial figures and that it foresees the most significant upside to EBITDA in the second quarter and third quarter of 2021. It said it's now ahead of Wall Street's EBITDA consensus estimate by 38% for the second quarter and by 36% for the third quarter.
Las Vegas is back to running at about 95% occupancy on the weekends and companies have been able to push weekend prices higher, the firm said. At the same time, companies are using price as a tool to bolster midweek traffic, sending occupancy rates up to between 50% and 60% compared with 30% in February.
Prices for rooms midweek are still down by up to 30% compared with 2019 levels, "but that discount seems to be improving to 10%-20% now for future bookings," Allen said.
Casino operators expect material improvement in May through the summer as they anticipate the government easing COVID-19 restrictions that include capacity being held at 50% and social distancing of 6 feet, the firm added.
Las Vegas will keep a close eye on "The World of Concrete" conference to be held on June 7 through 10 "as the true litmus test of if the market can handle large scale conferences again," said Allen. The calendar of events appears better for 2022 as some big events in the second half of 2021 have been converted to be held virtually.
"The big risk remains that fewer attendees will show up at future conferences," said Morgan Stanley.
MGM shares were trading near $13 each a year ago and Caesar's stock price has jumped from about $14 over the past 12 months.
Monday's note also reiterated its overweight ratings on Boyd Gaming and Wynn Resorts.