by Susan J. Aluise | February 16, 2012 12:48 pm
“You cannot beat a roulette table unless you steal money from it,” Albert Einstein once said.
The legendary theoretical physicist likely would have passed on the chance to buy into last week’s Caesars (NASDAQ:CZR) IPO. And considering the subsequent performance of CZR and the headwinds facing the gaming industry right now, the best play might well be to wait for better odds.
While an improving economy and white-hot growth in Macau drove casino stocks to new heights in 2011, the smart money in today’s market will value sustainable returns over eye-popping — but volatile — immediate gains. Consider Caesars, which roared out of the gate with a 58% return last Wednesday but has lost speed in every session since.
One week’s action on an IPO does not a trend make — particularly since the offering represented only a tiny fraction of the casino’s shares. Still, the stock’s quick flash and subsequent flameout illustrates the gaming industry’s abiding truth: The only sure thing about luck is how fast it can change.
The past five years have been a nonstop roller-coaster ride for casino stocks. From pinnacle performance in 2006 and early 2007, major stocks in the sector lost 80% to 90% of their value in less than 24 months. But as the U.S. economy has improved and opportunities have opened up in Macau, a former Portuguese colony now administered by the People’s Republic of China, the industry’s fortunes have rebounded dramatically. Some gaming stocks — particularly casino owners with high-end properties in Macau — saw 50% to 60% share-price growth in 2011.
While Macau remains an attractive opportunity for casinos such as Melco Crown Entertainment (NASDAQ:MPEL), Wynn Resorts (NYSE:WYNN) and MGM Resorts (NYSE:MGM), growth is likely to slow from a January level of nearly 35% to a more sustainable 15% to 20% in the second half of this year.
The Securities & Exchange Commission has taken an interest in some casino companies’ Macau operations. While the agency has not charged any company with wrongdoing, it is reviewing documents related to the Macau gaming licenses of WYNN and Las Vegas Sands (NYSE:LVS).
A winning play in casino stocks this year will look a lot different than it did in 2011. First, you can’t expect monster returns. Growth in Macau will slow as business operations broaden their focus beyond VIP junkets from China. U.S. regional operators such as Boyd Gaming (NYSE:BYD) and Penn National (NYSE:PENN) will have a better year than they did in 2011, but stronger competition from tribal gaming operations could have a negative impact.
Of course, there are no sure things in the gaming sector. All of these stocks are far from recession-proof and will take a hit if the economy slips. Most operators are carrying quite a bit of debt, and even the high-roller growth in Macau is by no means stable at this point. But if you have a little mad money stashed away, four of the companies mentioned above have relatively sustainable gaming stocks to play now:
If you believe in the China opportunity enough to let it all ride on Macau, MPEL is as much of a pure play as you’re going to get. MPEL blew investors’ socks off last week with news that its opulent City of Dreams Casino posted fourth-quarter earnings of $107.5 million on $1 billion in revenue. That’s nearly six times higher than the profit it posted for the same quarter a year earlier — and revenue was up 30%, too. With a market cap of $6.6 billion, MPEL is trading at $12 — 85% above its 52-week low in April 2011. MPEL has total cash of $1.2 billion and total debt of $2.3 billion. Its one-year return is 66%.
Despite its old-school name, LVS is a huge player in Macau. It boasts the world’s largest casino — the 3,000-suite Venetian Macau — which dominates the prime Cotai Strip. With a market cap of $42 billion, LVS is trading around $52 — 44% above its 52-week low in March 2011. LVS has total cash of about $4 billion and total debt of $9.7 billion. Its one-year return is 8%, but take note: This stock has been extremely volatile over the past year.
WYNN also boasts a high-roller-friendly facility, the Wynn Macau, with its Sky Casino. It plans to open the Cotai Resort Hotel on the strip in 2015. Chairman and CEO Steve Wynn’s high-profile tiff with right-hand man Kazuo Okada sparked the SEC’s interest and has the potential to become a distraction. With a market cap of nearly $14 billion, WYNN is trading around $111 — 10% above its 52-week low in December. WYNN has total cash of about $2 billion and total debt of $3.1 billion. Its one-year return is -7.8%, but it’s poised to gain if Macau continues to grow and the SEC inquiry is favorably resolved.
As Las Vegas casino revenue grows, so do MGM’s prospects. The Nevada Gaming Control Board last week said December gambling revenue on the strip rose by 3.6%, and slot-machine revenue rose over 6%. Convention attendance also rose dramatically last year. While MGM Macau has helped ease the profit pinch, the company’s best opportunity may be a new social-media game inspired by Zynga’s (NASDAQ:ZNGA) FarmVille. With a market cap of $7 billion, MGM is trading around $14.50 — 96% above its 52-week low last November. MGM has total cash of about $2 billion and total debt of $14.5 billion. Its one-year return is -4%, but its financial position is strengthening, and the stock has some upside.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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