by Will Ashworth | September 5, 2013 12:09 pm
August might have been a terrible month for the markets — the S&P 500 experienced a 3% decline for those 30 days — but it was a great month for most casino stocks.
Several gaming operators tested 52-week highs, including Melco Crown Entertainment (MPEL) and Caesars Entertainment (CZR). The strongest performances in the month of August came from operators with casinos in Macau, and the same is true for most of 2013.
Should you be a buyer or seller of casino stocks as a whole as we head into the final third of the year? That I can’t tell you. But I do have a couple picks for the days and weeks ahead:
Any buy recommendation should be strongly associated with Macau, whose gross gaming revenues in the first eight months of 2013 totaled $29 billion, or 16% better year-over-year. Although 70% of the gaming revenue in Macau is generated by high rollers, the real opportunity comes from middle-class tourists who account for a majority of the visitors to the world’s biggest gambling destination.
At the end of 2012, there were 23 casinos in Macau and another 12 on Taipa Island controlled by six different corporations, one of which I’d strongly urge you buy.
Of all the casino operators in Macau, Las Vegas Sands (LVS) is by far the biggest both in terms of global revenue and market capitalization. Its Macau operations generated $2.07 billion (64% of its overall revenue) in the second quarter, with its adjusted property EBITDA up 55% year-over-year to $655 million. With the exception of its Four Seasons Hotel Macau and Plaza Casino operations, its entire Macau business was on fire in the second quarter.
By late 2015, LVS will open the 3,000-room Parisian Macau, delivering even more cash flow to Sheldon Adelson and family.
In October 2011, I recommended InvestorPlace readers sell LVS and buy MGM Resorts International (MGM), suggesting MGM provided greater value at the time. Since then, MGM’s total return is 106% versus 63% for LVS. However, while MGM is still the cheaper stock, Las Vegas Sands is clearly the better company now, and Macau has a lot to with that.
Although Wynn Resorts (WYNN) is also building a giant $4 billion resort along the Cotai strip in Macau that should be ready by February 2016, LVS’s stronger financial position makes it the better buy in my opinion.
Conversely, the stock to sell is a casino operator without any business in Macau.
Although there are several to choose from, I have to go with Caesars Entertainment, which went public in February 2012 at $9 per share. Private equity firms TPG Capital and Apollo Global Management (APO) paid $30.7 billion for Caesars in 2008, financing the deal with $25 billion in debt and $6 billion in equity. That equity today is worth approximately $2 billion, or one-third what was invested in 2008.
TPG and Apollo have made out like bandits despite the fact their investors have seen little return on their investment, with bankruptcy rumors swirling.
Bear with me.
Caesars’ most valuable asset is its online gaming investments, which include the World Series of Poker. Vince Martin, a writer with CalvinAyre.com, does a good job explaining the sheer stupidity of Caesars’ latest move to create the illusion of value with investors. Essentially, the company has created a subsidiary — Caesars Growth Partners LLC (CGP) — that will own the interactive assets as well as the Planet Hollywood casino in Las Vegas and 52% of the Horseshoe Baltimore, which is currently under construction. Current Caesars shareholders will be able to purchase up to 125.4 million shares in Caesars Acquisition Company (CAC) at $9.43 each. If fully subscribed, CAC will raise $1.2 billion in cash and own 43% of the CGP assets (CZR the remaining 57%) described above along with a $1.1 billion note from Caesars Entertainment Operating Company.
It all sounds nice until you realize that Caesars shareholders buying CAC shares won’t have any voting control over the future of these assets. Although CZR will hold an economic interest of 57% in the CGP assets, CAC will hold 100% of the voting rights (majority held by TPG and Apollo) in CGP, leaving CZR out in the cold when it comes to CGP’s future. While the transaction successfully shields its interactive assets from the staggering amount of debt Caesars owes, it does little to add value for CZR shareholders. At best, it holds the debt collector at bay.
Since this complicated structure was announced by Caesars in April, its stock has gained 69% through Sept. 3. That’s an awful lot for a company whose net debt is 11 times EBITDA. Whether you’re considering CZR’s or CGP’s stock, let me save you the trouble — don’t. This entire structure is fraught with danger.
If you own CZR, sell. And if you don’t, forget you ever heard of it. You won’t regret passing on this turkey.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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