by Will Ashworth | December 2, 2013 10:00 am
Online gaming in New Jersey got underway Nov. 21 at three different websites including CaesarsCasino.com.
That’s a major development in the push to bring gambling to the Internet. Despite this milestone, it’s still up for debate whether online gaming will take off in the U.S. the same way onsite gaming did.
While we wait out the fate of online gaming, investors are showing an insatiable appetite for casino stocks of every size and description. But with so many options to choose from, how do you separate the winning hands from the rest?
Here are my ratings for the five largest casino stocks trading on a U.S. exchange.
Las Vegas Sands (LVS) is one of the world’s biggest casino operators for a very good reason — Sheldon Adelson. While everyone else was focused on Vegas and other cities across America, Adelson was busy pushing into Macau, which is now the world’s busiest casino market by a long shot. Forbes called it “Vegas on Steroids” in an article about the former colony’s gaming market.
In its Q3 ended Sept. 30, LVS generated 66% of its $3.6 billion in revenue from Macau and another $774 million from its Marina Bay Sands property in Singapore. Its U.S. properties generated just 14% of revenue and, more importantly, just 9.2% of its $1.3 billion in adjusted property EBITDA.
The U.S. is an insignificant piece of its business, although you can bet Adelson will jump if he thinks its potential improves. In the meantime, LVS has a Singapore property whose adjusted property EBITDA margins are 50% higher than in Macau. Macau might be number one, but its Marina Bay Sands property is the real star.
In early September I recommended investors buy LVS stock. Since then, LVS is up 20% through Nov. 25, compared to 10% for the SPDR S&P 500 (SPY). Year-to-date it’s up 55%, 26 percentage points higher than the SPY. The entire casino sector has done well in 2013 with the Market Vectors Gaming ETF (BJK) up 39%. As long as gamblers keep flocking to Macau (which they will), LVS is in great shape heading into 2014.
I wouldn’t have guessed this, but through the first nine months of 2013, Wynn Resorts (WYNN) generated 71% of its overall revenue from Macau casinos — compared to 64% for LVS. Mind you, LVS’s Macau revenues were $3.5 billion greater, but it definitely shows a commitment by Steve Wynn to the Macau market.
In fact, with the first phase of its 51-acre Wynn Palace expected to open by February 2016, the casino operator will only get bigger in Macau. The $4 billion development is expected to have 500 gambling tables, 2,000 hotel rooms, 10 restaurants, a nightclub and some high-end retail. Its second phase, Wynn Diamond, will be primarily a non-casino development including a 15,000-sear auditorium for major concerts, etc.
The best part about WYNN — well, besides Steve Wynn himself — is that the stock has gained roughly 50% in the past 52 weeks. That’s the same return as LVS, yet WYNN’s enterprise value is 12.8 times EBITDA — 15% less than its competitor’s. From a value standpoint, WYNN is the better buy.
Melco Crown Entertainment (MPEL) is up 130% over the past 52 weeks. With the exception of its City of Dreams development in Manila, all of MPELs properties are in Macau. A majority of its revenue and adjusted property EBITDA is generated by its City of Dreams property in Macau.
In the first nine months of 2013, City of Dreams Macau generated adjusted property EBITDA of $846 million, or 86% of its overall total. It’s the engine that drives this bus, growing 44% year-over-year.
One of the major beneficiaries of a booming Macau is James Packer, an Australian billionaire who gambled $600 million on his 33.65% joint-venture interest in MPEL in 2005, which is now worth $6.4 billion and growing. I think it’s safe to say that Packer won’t be selling anytime soon.
Given MPEL’s strong four-year run, averaging an annual total return of 80%, investors who have been along for the ride might want to consider taking some profits. However, I wouldn’t unload your entire stake because it looks to have some more room to run.
How do you lose money in the casino business? Well, the first way is by operating properties mostly in the U.S. Caesars Entertainment (CZR) owns and manages 42 casinos in the U.S. and Canada, including nine in Las Vegas. While its revenues have been flat in the first nine months of the year, its loss from continuing operations before tax was $2 billion — a 39% bigger loss than in the first nine months of 2012. CZR simply has too many properties that aren’t performing. Its Las Vegas casinos are the least of its worries.
The second way you lose a huge amount of money in the casino business is by racking up a huge amount of debt, which your cash flow can never hope to repay. At the end of the third quarter, CZR had long-term debt of $21.3 billion, resulting in $1.7 billion in interest payments or $2.3 billion on an annualized basis. If we subtract its direct operating expenses and SG&A overhead, there’s $1.7 billion left to pay $2.3 billion in interest.
That’s why CZR has spun off its most promising interactive assets into Caesars Acquisition Company (CACQ). Shielded from the massive debt, the online gaming could have some upside. Personally, I wouldn’t own either stock, but CACQ is the better of the two if you’re crazy enough to play with fire.
MGM Resorts International (MGM) owns 51% of MGM China Holdings Limited (MCHVY). MGM China in turns owns one casino in Macau, with another on the way in Cotai. The $2.5 billion development will include 500 gaming tables, 2,500 slot machines and 1,600 hotel rooms. It’s going to be a player come the middle of 2016 once the new casino opens for business, but by the time it does, MCHVY will face significant competition in both regions.
While MGM’s situation is much better than Caesar’s thanks to Macau, its debt is still a significant concern. At the end of September, it had $13 billion in long-term debt or 51% of its total assets. Although it’s reduced its debt by $550 million so far in 2013, it will still shell out $865 million in interest payments this year making it awfully difficult to generate decent profits. Furthermore, its 50%-owned interest in the City Centre development in Las Vegas continues too lose millions, although the loss has slowed in recent quarters.
At the end of the day, LVS and WYNN (and, to a lesser extent, MPEL) are all better-positioned financially to take advantage of the future in global gaming.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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