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Do You Dare Chance Casino Stocks Now?

It's worth putting these Vegas plays under the debt microscope


What better investment could there be than to bet on a company that offers a service people pay for, and even after paying for that, will gamble their money on a set of games that are designed to make the player lose?

Traditionally, casino stocks have been exactly that. People pay a resort to stay in a room there, pay even more for food and booze, then spend their free time gambling on games that always favor the house.

However, hard times have hit Las Vegas. The recession knocked it for a loop. People stopped traveling there, stopped spending money and stopped gambling. But all those resorts still have a lot of debt to pay off because that debt is what allowed those resorts to get built in the first place.

So can you bet on any casino stocks right now? Yes.

Steve Wynn is a survivor. He’s been in Vegas for decades, starting off as a liquor salesman. He sold off his casino assets in 2000 to MGM Grand and became a billionaire. Then he opened Wynn Resorts (NASDAQ:WYNN). And he did it the right way.

Wynn wanted to make sure he had the liquidity to upgrade the resort every few years so it would remain competitive with the ever-changing Vegas landscape. He raised several hundred million dollars in an IPO, he and his partner put up more equity, and he drew only 40% leverage to build the resort. Today, the company sits on only $3 billion in debt — and that amount has been decreasing every year.

Despite the recession, the company remains cash flow positive, its expansion into Macau has been a gigantic hit, and Wynn is so confident in his company that he just announced a special $5-per-share dividend. The company trades at 25 times this year’s estimates. Frankly, I think it remains a winner and a long-term “hold.”

Las Vegas Sands (NYSE:LVS) also is a good choice. While dealing with more debt ($9 billion), the company came off a horrible 2009 loss of $540 million to a $407 million 2010 profit, and is on track to more than double that this year. FCF, which had been negative, is solidly positive this year.

The company is 49% held by insiders, so management has every reason to keep reducing debt and manage its liquidity as it has been doing. Macau also is doing well for LVS. The company is trading at a similar multiple as Wynn — 25 times, with 25% annualized growth going forward. I think this is a safe bet.

As for MGM Resorts International (NYSE:MGM), all I can say is betting on this stock is like making a horn bet at the craps table. The company had the misfortune of undertaking the massively expensive CityCenter project right when the financial crisis hit. MGM took on enormous debt for this project. Right now, that debt stands as $12 billion. The company lost more than $1 billion in 2009 and 2010.

While MGM has stemmed the blood loss this year — and has some meager FCF — that debt burden eventually will choke the company. Yes, it has put off maturity dates, and no, it’s not going bankrupt anytime soon. As I said, however, it’s a long shot. I think it’s a sucker’s bet, but if you buy in and MGM survives, you’ll likely see a fantastic return.

So, spin the wheel and place your bets. If I had to pick one, I’d go with Wynn.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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