by Will Ashworth | October 4, 2011 12:58 pm
In an interview with Bloomberg Television, Las Vegas Sands (NYSE:LVS) CEO Sheldon Adelson suggested it could start paying a dividend as early as next year as its cash levels exceed its debt thanks to continued success at its Macau and Singapore casinos.
But dividend investors should stay away from Las Vegas Sands — or any other casino stock, for that matter. They’re just too volatile. Those looking for capital appreciation, though, might want to take a pass on LVS and instead look to MGM Resorts International (NYSE:MGM) for some contrarian gains. Here’s why.
At its zenith in 2007, MGM’s market cap was $25 billion and its share price was over $100. How times have changed. Its stock is one-tenth the value, and earnings are in the red — and have been for some time. In the past three years, MGM has lost a total of $2.3 billion from operations. In the same three-year period, Las Vegas Sands had an operating profit of $1.3 billion, a difference of $3.6 billion.
Clearly, Las Vegas Sands is the better choice of casino stock based on earnings alone, but as always, there’s more involved than just bottom-line numbers. For instance, MGM’s total number of visitors in 2011 is estimated to be around 40 million — the same amount as in 2007 when it was setting record revenue and profits. It follows that before you can turn business around, you have to get the traffic up, which MGM has.
Adelson said in the Bloomberg interview, “I do feel Las Vegas is coming back, albeit slowly.” He went on to suggest that while fewer Americans are gambling in the U.S., more Asians and other foreigners are visiting Las Vegas. This is great news for MGM, which has 740 acres of real estate on the strip compared to 82 acres for Las Vegas Sands and 240 for Wynn Resorts (NASDAQ:WYNN). If the U.S. ever could find a way out of this economic mess — and that’s a big if — MGM is perfectly positioned to benefit from any renaissance.
Las Vegas Sands’ adjusted property EBITDA margin in Q2 was 38.4% — 870 basis points higher year-over-year. MGM Resorts’ margin increased 470 basis points in the quarter, to 20.3%. Not quite Las Vegas Sands, but it’s heading in the right direction.
It’s important to note that Las Vegas Sands generates 79% of its revenue from its casino operations compared to 44% for MGM Resorts, which operates on an entirely different business model. Back in the second quarter of 2007, MGM’s casino operations accounted for 40% of overall sales, yet its operating margin was 24% compared to 10.4% in 2011. In addition, revenues in Q2 2007 were $1.9 billion compared to $1.8 billion in 2011. What this tells me is that MGM doesn’t have a revenue problem, necessarily — it has an expense problem, which the casino company continues to fix.
MGM has had two consecutive sequential quarters of operational improvement, and should this continue, its operating margin could be in the mid-teens by the second quarter of 2012. With no major expenditures on the horizon, the free cash flow will be considerably higher, allowing it to chip away at its debt, which sits at 11 times EBITDA — approximately double Las Vegas Sands.
Las Vegas Sands isn’t a bad casino company. However, successful investing isn’t about buying the best companies possible, but good ones at reasonable prices. MGM Resorts has some excellent properties, and if City Center can ever live up to the hype, its stock becomes obscenely cheap. As it stands now, MGM still is a much better value than its peers. Trading at 0.8 times sales, it’s one-fifth that of Las Vegas Sands and one-fourth Wynn Resorts. On a price-to-book basis, MGM trades at 0.8 times book value, much lower than LVS at 4.2 times and WYNN at 6.3 times.
Given that it now controls MGM Macau, which has 10% market share of the gaming revenue there and continues to improve its competitive position vis-à-vis Wynn Macau, this will help keep things moving forward until Las Vegas fully rebounds.
MGM Resort’s stock is down 37% year to date. Meanwhile, Las Vegas Sands is down just 17% in 2011 on top of far superior returns in both 2009 and 2010. Reversion to the mean suggests that, between these casino stocks, now is the time to ditch LVS and buy MGM instead.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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