2 Casino Stocks to Hold, 2 to Fold

A slowdown in high-rolling Macau is adding to the concern

   
2 Casino Stocks to Hold, 2 to Fold

“A dollar won is twice as sweet as a dollar earned,” Paul Newman’s “Fast” Eddie Felson famously said in The Color of Money. Unfortunately for casino operators, a tenuous U.S. economic outlook and a slowdown in Chinese high-rollers visiting Macau are adding a bitter aftertaste to recent earnings.

Although this week’s quarterly reports from Caesars Entertainment (NASDAQ:CZR) and MGM Resorts International (NYSE:MGM) were a far cry from the fear and loathing that gripped Las Vegas gaming stocks during the Great Recession, they do strike a cautionary note for investors in the sector.

In Monday’s earnings report, CZR lost $241.7 million ($1.93 a share) in the second quarter compared to a $155.5 million ($1.24 a share) loss for the same quarter last year. That’s double the 96-cent a share loss Wall Street expected. Revenue of nearly $2.17 billion missed analysts’ estimates of nearly $2.3 billion.

MGM’s results went down easier with Wall Street on Wednesday, as the casino operator posted a lower-than-expected quarterly loss on better-than-expected revenue. The company, which is a big player both in Vegas and the China-administered gaming haven of Macau, lost $70.4 million in the second quarter (30 cents a share) on revenue of $2.5 billion.

Although analysts had expected a loss of only 15 cents a share, investors gave MGM a pass on one-time charges that accounted for 18 cents of that loss. MGM beat the Street’s revenue estimate of $2.3 billion.

Still, the quarterly reports illustrate the truth in gaming today: It’s getting tougher to make a buck. Conventional wisdom once held that casino stocks were recession-proof. But that was before the Great Recession, when major players lost 80% to 90% of their value between 2007 and 2009.

The sector began to bounce back in 2010, and white-hot growth last year in Macau sent big names soaring. While I don’t expect a replay of the Great Recession’s total meltdown in gaming stocks, I do expect some earnings stagnation in the near term. Although there are no sure things when it comes to casino stocks, if you want to test your luck in this sector, here are two stocks to hold and two to fold:

Hold

Melco Crown Entertainment (NASDAQ:MPEL). Investors punished MPEL for missing on the top and bottom lines on Tuesday, but don’t count this stock out yet. Hong Kong-based Melco, the closest thing to a pure-play on Macau, reported earnings of 15 cents a share — 3 cents below analysts’ estimates. Revenue, which at $938.5 million was about 2% lower than the same quarter last year, missed expectations of $978.8 million.

That said, earnings still rose by 25%, and the stock has the tiniest price-to-earnings growth (PEG) ratio in the sector at less than 0.5, indicating it’s well undervalued. Although concern over a slowdown in Macau is justifiable, I think Melco is still a better short-term bet than U.S.-focused operators right now.

MGM Resorts. Despite the better reception from investors Wednesday, MGM faces the same headwinds as its rivals: It’s getting tougher to for the house when cautious consumers are keeping a tight grip on their wallets. Still, there are positives: MGM’s second-quarter slump in convention bookings hasn’t hurt long-term bookings, and early signs point to stronger growth in 2013 and 2014. The company also is expanding its customer acquisition efforts — including a boost in social media usage.

Fold

Caesars Entertainment. Caesars, whose shares have gone from sizzle to fizzle since the IPO back in February, provides a case study of the turbulence facing the gaming industry. The largest U.S. casino operator even fell short of analysts’ low expectations. Gambling revenue at Caesars’ Atlantic City fell more than 8% during the second quarter as consumers grew cautious. Nevada properties — including the landmark Caesar’s Palace on the Las Vegas Strip — also slipped, adding up to a larger-than-expected loss.

Chairman and CEO Gary Loveman summed it up in Monday’s conference call: “There’s a trepidation on the part of consumers to spend at the rate they have historically.” I’d extend that trepidation to CZR stock for now.

Las Vegas Sands (NYSE:LVS). A huge player in Macau and Las Vegas, LVS took an earnings hit from both venues when it reported late last month. Second-quarter profit dropped 34%, largely on falling gambling revenues. The Justice Department also is investigating LVS over possible money laundering in the U.S. And the company’s Macau unit, Sands China, is embroiled in a federal investigation into its operations. Legal distractions, combined with a high debt burden and current headwinds facing the sector, make LVS a riskier bet now.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/08/2-casino-stocks-to-hold-2-to-fold/.

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