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Gambling stocks have outperformed the S&P 500 since the second quarter, rising 1% compared with a decline of 5% for the index.

Is it time to bet on gambling stocks? Bank of America analysts see some opportunities.

Gambling stocks have outperformed the S&P 500 since the second quarter, rising 1% compared with a decline of 5% for the index.

Macau has constituted the best subsector, even after its recent pullback. And gambling-related real estate investment trusts have fared noticeably better than the broader REIT index, the investment bank‘s analysts wrote in a commentary.

The Federal Reserve’s interest-rate increases crimped personal income, hurting demand for gambling.

Higher interest rates could be around a 5% headwind to free cash flow for the gambling sector, the analysts said. 

But their models still point to a free-cash-flow yield of 13% for gambling companies outside sports.

Bank of America analysts assign buy ratings to a number of gambling companies, listed here alphabetically:

· Boyd Gaming  (BYD) – Get Boyd Gaming Corporation Report

· Caesars Entertainment  (CZR) – Get Caesars Entertainment Inc. Report

· Churchill Downs  (CHDN) – Get Churchill Downs Incorporated Report

· Penn Entertainment  (PENN) – Get Penn National Gaming Inc. Report

· Vici Properties  (VICI) – Get VICI Properties Inc. Report

Boyd Gaming: Bank of America analysts have a $65 price target, 25% above recent trades around $52.56.

Factors that could push the stock beyond the target are “continued margin improvement, quicker-than-anticipated balance sheet deleveraging, … and sports betting,” the analysts wrote

Risks to the downside are continued impact from covid, a broader economic slowdown, slower-than-anticipated deleveraging and weak execution of integrating recent transactions.

Caesars Entertainment: The analysts set a $65 price target, 73% above a recent price of $37.67.

Factors to the upside include marketing reductions, improved underlying revenue, sports betting, and asset sales, they said.

Risks to the downside are high financial and operating leverage and possible problems with Caesars’ region-centric cost-reduction model in a market as competitive as Las Vegas, the analysts said.

Churchill Downs: B of A analysts have a $255 price target, 27% above a recent quote of $201.08.

The upside factors consist of investors reacting more to online sports betting and iGaming potential and continued increases in financial multiples across consumer stocks, the analysts said.

The downside risks include less profitable development of historical racing machine facilities and failure to maintain elevated Ebitda (earnings before interest, taxes, depreciation and amortization) margins.

Penn Entertainment: The investment bank has a $45 price target, 55% above a recent price of $29.31.

Factors to the upside are Penn winning unexpected casino licenses, sports betting beating expectations, and better-than-anticipated consumer trends, they said.

Risks to the downside include continued geographic competition, consumer weakness, and a smaller-than expected sports opportunity.

Bank of America’s report didn’t offer an analysis of Vici Properties. 

It did include a commentary about MGM Resorts (MGM) – Get MGM Resorts International Report, which the analysts rate at neutral. They have a $35 price target, 8.5% above a recent quote of $32.25.

Factors to the upside include a stronger-than-anticipated recovery in Las Vegas and the company’s majority ownership stake in MGM China, the analysts said.

Risks to the downside are execution problems for sports betting and iGaming and increased Las Vegas Strip promotional competition.