by Lawrence Meyers | February 1, 2013 9:03 am
Things have been a bit erratic in the gaming world lately, but there’s been some very interesting moves going on that I think investors should take note of and act accordingly.
The big news out of Macau — the new gaming capital of the world — is that Las Vegas Sands (NYSE:LVS) has received approval to open up 200 more gaming tables. This might not sound like much, but in the competitive space of Macau, it will increase Sands’ table market share to about 27%.
Sands has another leg up, in that a new hotel tower will bump up its market share of rooms to 40%. This creates an advantage over competitors like Wynn Resorts (NASDAQ:WYNN) in that rooms can be made available for regular cash players, and not just the whales, which need to have rooms blocked off.
Speaking of Wynn, the company missed estimates by 10 cents in its latest quarter, and the namesake CEO said it was due to tough competition in Macau. Indeed, Sands itself beat estimates. Wynn said high roller revenue in Macau was off 6.6%.
Meanwhile, back in the U.S. in November, Penn National Gaming (NASDAQ:PENN) announced it would split into a gaming concern and a hospitality REIT. While gaming revenue has been erratic for all the resorts, the hospitality business has been going strong. With RevPAR, ADR and occupancy metrics rising by impressive amounts off the lows of the financial crisis, it has been a good time to own hotels. Demand is increasing while supply has been relatively flat. That’s a great place to be if you own a hotel.
By splitting its operations, PENN management believes it can take advantage of the real estate side of the equation and create more value there should gaming continue to lag. Indeed, the casino side will pay the real estate side $450 million annually in rent.
On the infrastructure side, Scientific Games (NASDAQ:SGMS) bought out WMS Industries (NYSE:WMS) for a 59% premium. WMS designs, manufactures, sells and leases gaming machines, just like International Game Technology (NYSE:IGT). The latter has been seeing strong growth in its online gaming platform, and I believe it might end up with a very robust business in that arena. With the WMS purchase, I imagine various suitors are keeping an eye on IGT.
Needless to say, amid all the buzz in gaming and casinos, there are many different ways to play this sector right now.
Gaming revenue has been all over the map, but mostly the trend has been toward contraction (Penn National missed estimates also). On the other hand, as mentioned, the hospitality side has been strong. That’s why I think gaming/resort companies are best used as trading vehicles.
If that’s the route you choose to go, I think you could do well by studying many of the big gaming stocks — Wynn, Sands, MGM Resorts (NYSE:MGM) and maybe Caesars Entertainment (NASDAQ:CZR) and choose one of these to play. However, my bet here is on Wynn; if you want to trade it, too, wait for WYNN to fall back to $100 or so.
I think Penn National is interesting as an REIT, and I would buy that as a long once the spinoff occurs.
I’ve written before that IGT makes for a speculative long-term play with limited downside risk. Its 14% expected earnings growth rate is attractive, and its online gaming initiative, DoubleDown Casino, could pay off big-time in the future.
Another way to go is to buy the Market Vectors Gaming ETF (NYSE:BJK), which holds these stocks and other gaming-related securities, but keep in mind that the BJK is very thinly traded. The ETF charges 0.65% in expenses.
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 financing, strategic investments, and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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