by Jonathan Berr | October 7, 2011 7:00 am
In September, I wrote that none of the Macau casino stocks were a compelling value. The shares have slumped because of concerns abut an economic slowdown in Asia and are getting too cheap to ignore.
Shares of Wynn Resorts (NASDAQ:WYNN), whose Macau property features a 222,000-square-foot casino, 600 luxury rooms and suites along with 46,000 square feet of retail space, have been pushed down more than 11% in the past month. Las Vegas Sands (NYSE:LVS) owns three properties in Macau. Its shares fell more than 7% during the past 30 days. Melco Crown Entertainment (NASDAQ:MPEL), a Hong Kong-based operator with properties in Macau, is down more than 23% during that same time.
Although there is legitimate concern about the Chinese economy overheating, there is no evidence — as of yet anyway — that this is significantly affecting the corporate junket business, which is the lifeblood of Macau. However, fears of a credit crunch recently jarred casino stocks. Still, regional casino revenue gained 38.8% in September, the first time it grew less than 40% since January, according to local media reports. Compared to Nevada, where casino revenue gained 3.7% in July, those results are outstanding.
The news about the Chinese economy is not all bad, either. Premier Wen Jiabao recently was quoted as saying that the world’s most populous country has made progress in taming inflation. China’s real estate bubble, though, remains a concern.
Wynn Resorts, which gets about one-third of its revenue from Macau, and Las Vegas Sands, which gets 40% of its sales, both seem like compelling values. Wynn, controlled by Stephen Wynn, trades at a price-to-earnings multiple of 39. Las Vegas Sands’ multiple is 33.25. Melco Crown’s valuation is a lofty 42.37. Although these shares are trading at a premium to the S&P 500 multiple of 15.02, Wall Street analysts rate all three shares as a “buy.”
Wynn Resorts, which last traded at $130.66, is expected to hit $170.52, the median price target of Wall Street investors. Analysts have a mean price target of $58.04 on Las Vegas Sands, well ahead of the $41.63 level where they recently traded. Wall Street’s one-year target on Melco’s ADRs is $16.31. Melco Crown surged 14% Thursday to $9.56, and Wynn and Las Vegas Sands also jumped on the day.
If investors have to choose one Macau stock, I would go with Wynn since it’s the only one of the three that pays a dividend. The other attraction to Wynn is its U.S. properties since gaming will continue to rebound unless the economy really craters. Plus, revenue in the current quarter is expected to rise more than 28%, surpassing the 23% expected at Las Vegas Sands and nearly matching the 29% expected at Melco Crown. The Asian company, however, seems far too pricey compared to its U.S. rivals.
Investors also might want to wait for shares of the Macau stocks to become more affordable. But if people are wondering whether these companies are worth a gamble, the answer is “yes.”
As of this writing, Jonathan Berr did not own a position in any of the aforementioned stocks.
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