by Lawrence Meyers | October 9, 2012 1:25 pm
Investing in gaming stocks is not what it used to be.
Ever since Macau came online in the gaming world, investors have been excited about the prospect of lots of new revenue. Regrettably, Macau came online about the time of the financial crisis, and ever since there have been questions about how long China would be on fire.
Macau is growing, and it’s nothing to sneeze at, but everyone’s all bummed out that it’s growing at 12% instead of 50%. Nevertheless, with visitation down 0.6%, that means fewer people for the casinos to fight over.
Meanwhile, back in the U.S., Arkansas, Rhode Island, Oregon and Maryland all have ballot initiatives involving casino gaming. There’s a lot at stake for small gaming companies, as well as public companies like International Game Technology (NYSE:IGT) that manage to get their games into any of these potential casinos.
However, casino ballot initiatives often face stiff resistance, often from established gaming concerns like horse racing that don’t want the competition, or from people who still believe it will attract “the wrong crowd” to their state. Indeed, two initiatives in Oregon are, at last polling, significantly behind, although a large undecided base remains. The one in Arkansas was getting crushed back in a July poll.
Gone are the growth days of innovative vendors like SHFL Entertainment (NASDAQ:SHFL), which found itself in such bad shape that it had to rebrand itself from its old Shuffle Master name. The company has turned around impressively and if it can continue to innovate, it might be worth a look. Bally Technologies (NYSE:BYI) is loaded with debt, but it’s generating a lot of cash flow, so that’s not a huge concern. Its profit has bounced around a lot in recent years, and Bally appears to have settled into a long-term growth rate of 15%.
In fact, both of these might be better plays than the casinos themselves.
As an investor, the thing to remember about casino stocks is that you are beholden to two trends. One is the hospitality angle, which is in the early part of a growth cycle. The other is the gaming angle, where revenues are dependent on both the number of visitors and pure chance. Since games are tilted to the house’s favor, that’s a long-term slam dunk. But there can be blips, and as we’ve seen with Macau, gaming revenue can be volatile.
That’s why I think gaming stocks are trading stocks, not buy-and-hold investments. You want to get in on the low end of a range and sell at the high end.
Wynn Resorts (NASDAQ:WYNN) remains the gold standard for Las Vegas casinos. It generated more than a billion dollars in free cash flow in the trailing 12 months. It was paying down its debt before it drew down more for Macau expansion. WYNN stock is at $113, well off its high of $161 and off the low end of a trading range at $95. There’s more upside than downside here, as far as risk-reward is concerned. Plus, I would never bet against Steve Wynn. If you insist on holding a casino stock long-term, I would choose Wynn.
Las Vegas Sands (NYSE:LVS) sits on a lot more debt, but the company has been paying it down gradually, and TTM free cash flow is $1.6 billion, so it’s also on solid ground. LVS is at $45, off its 52-week high of $62. It, too, is off its trading range low of $37, so I think this is also a good entry point.
MGM Resorts (NYSE:MGM) remains loaded with $13.2 billion in debt, and generating $400 million of free cash flow every year will not change its prospects. To me, you either short the stock because you think it’s eventually doomed, or buy MGM as a speculative play that it will turn around and you’ll make multiple times your investment.
Caesars Entertainment (NYSE:CZR) is an even worse play than MGM, with $20 billion in debt, $900 million in losses over the TTM, is free cash flow negative and somehow has managed this despite being the most diversified of the lot. It’s more likely to go under than see $15, so I would consider shorting CZR if its cash burn continues.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.
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