Gaming’s Big Macau Players Are a Gamble

by Jonathan Berr | September 2, 2011 12:44 pm

Casino 300x200 Gaming's Big Macau Players Are a GambleWhen it comes to casino stocks, investors have not always had Lady Luck on their side — even in the red-hot gaming market of Macau.

Shares of Wynn Resorts (NASDAQ:WYNN[1]) have soared more than 46% this year because its operations in Macau are growing like gangbusters. The Macau magic, however, has not rubbed off on Las Vegas Sands (NYSE:LVS[2]), which has barely budged this year amid investors’ concerns about lawsuits alleging illegal activities in Macau[3], which the firm has denied. MGM Resorts (NYSE:MGM[4]), which recently took control of its Macau joint venture, has been hurt by concerns about its lackluster earnings. Its shares have slumped nearly 30%.

None of these stocks are a compelling value even though Macau gaming revenue was a record $3.1 billion in August[5], an increase of 57% year-over-year.

Wynn Resorts — whose Macau property[6] features a 222,000-square-foot casino, 600 luxury rooms and suites along with 46,000 square feet of retail space — trades at a multiple of more than 50, well above the average P/E of the S&P 500, which is about 16. Wall Street analysts have an average target price of $150 on the stock, which about where it trades now.

Las Vegas Sands, which owns three properties in Macau and one in Singapore, might have more upside potential than Wynn Resorts. Analysts have an average price target of $53.50 on the stock, above the $45.01 where it traded recently. It has a more reasonable multiple of 38.

Sands China Ltd., a subsidiary of Las Vegas Sands, reported $1.21 billion in quarterly revenue[7], up 16.3% from 2010. Net income rose 100.1% to $267.4 million. Adjusted property EBITDA for Sands China Ltd. increased 27.1% to $382.1 million. Second-quarter net revenues at Wynn Macau were $976.5 million[8], a 36.7% increase over 2010. Adjusted property EBITDA rose 45.4% to $314.3 million.

Future success in Macau is far from certain. Concerns about China’s economy overheating appear to be justified[9]. Moreover, Wynn and Las Vegas Sands face formidable local competitors in Macau such as Melco Crown Entertainment (NASDAQ:MPEL[10]) and Asia Entertainment & Resources (NASDAQ:AERL[11]). But the American firms have an ace up their sleeves that the Chinese firms don’t — Las Vegas.

Wynn CEO Stephen Wynn bragged on his company’s recent earnings conference call that in early July, Wynn’s operations in Sin City equaled their performance in 2010[12], “so for the balance of the year, everything from here on in, in Las Vegas is improvement.” His counterpart at Las Vegas Sands, Sheldon Adelson, touted the 41% gain in adjusted EBIDTA[13] at his Vegas properties because of an increase in conventions and the “improving Las Vegas environment.” Indeed, the Las Vegas Strip went jokers wild in May and June, posting gains of 28.93% and 32.31%[14], respectively, boosted by increased revenue from table gains.

“Definitely, we had two good months,” says Dr. David G. Schwartz, Director of the Center For Gaming Research at the University of Nevada Las Vegas, adding that he wasn’t sure how the casinos have done since then because of the stock market’s recent volatility. “Some of the fundamentals (consumer confidence and national unemployment) don’t look so hot.”

MGM, the largest casino operator on the Vegas Strip, also owns MGM Macau, a five-star resort, through a Chinese subsidiary it controls. Although its second-quarter results were better than expected[15], its profitability is shaky. Analysts expect MGM to lose money for the next two quarters along with 2012. But it does have some upside potential. Wall Street analysts expect MGM’s shares to hit $16.50, more than $6 above where they trade now.

For now, investors should hold off on putting new money into the sector until macroeconomic conditions become clearer.

Jonathan Berr owns no shares of the companies listed. Follow him on Twitter at @jdberr.

Endnotes:
  1. WYNN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WYNN
  2. LVS: http://studio-5.financialcontent.com/investplace/quote?Symbol=LVS
  3. about lawsuits alleging illegal activities in Macau: http://www.vegasinc.com/news/2011/may/23/law-firms-compete-lead-suits-against-las-vegas-san/
  4. MGM: http://studio-5.financialcontent.com/investplace/quote?Symbol=MGM
  5. was a record $3.1 billion in August: http://www.marketwatch.com/story/macau-casinos-set-revenue-record-in-august-2011-09-01
  6. whose Macau property: http://en.wynnmacaulimited.com/phoenix.zhtml?c=231614&p=irol-homeProfile&t=&id=&
  7. reported $1.21 billion in quarterly revenue: http://investor.lasvegassands.com/releasedetail.cfm?ReleaseID=594197
  8. were $976.5 million: http://phx.corporate-ir.net/phoenix.zhtml?c=132059&p=irol-newsArticle&ID=1586172&highlight=
  9. appear to be justified: http://www.nytimes.com/2011/04/16/business/global/16yuan.html?pagewanted=all
  10. MPEL: http://studio-5.financialcontent.com/investplace/quote?Symbol=MPEL
  11. AERL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AERL
  12. equaled their performance in 2010: http://seekingalpha.com/article/279999-wynn-resorts-ceo-discusses-q2-2011-results-earnings-call-transcript
  13. touted the 41% gain in adjusted EBIDTA: http://seekingalpha.com/article/282067-las-vegas-sands-ceo-discusses-q2-2011-results-earnings-call-transcript
  14. posting gains of 28.93% and 32.31%: http://gaming.unlv.edu/
  15. were better than expected: http://www.bloomberg.com/news/2011-08-08/mgm-resorts-beats-estimates-on-macau-boom-vegas-recovery-1-.html

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