Casino stocks have surged in recent years as VIP gambling in Macau has pumped up profits. But with Macau gaming facing headwinds now, the winning hand for casino stocks might well be in the resurgence of Las Vegas.
Although gaming once had the reputation of being a recession-proof industry, the sector’s luck ran out during the Great Recession. Between 2007 and 2009, major casino stocks lost as much as 90% of their value. But by mid-2010, Lady Luck found her way back and casino stocks began to surge again — in large part because of gaming operations in Macau, a former Portuguese colony administered by the People’s Republic of China.
Macau, with its high-end properties and lucrative VIP players, is largely responsible for delivering huge gains for casino stocks. Gaming revenue in Macau has been growing at a double-digit clip over the past three years and in March, industry analysts forecast gaming revenue to hit $40 billion this year.
But as every gambler knows, sooner or later your luck will run out. After kicking off this year with a growth rate of nearly 17%, Macau gaming revenue in June fell 3.7% year-over-year — the first decline since June 2009.
While the World Cup can be blamed for some of the slip, one key dynamic poses a short-term red flag: declining VIP play. In the aftermath of recent money laundering scandals and slower growth in China, Macau’s gaming revenues will continue to rise, but at a far slower pace than the 30% growth gaming companies have experienced in recent years.
The silver lining to the Macau clouds was that Nevada gaming revenue soared by more than 14% in June. There are early indications that Macau revenue growth was stronger in July than it was in June — and that bodes well for the sector over the long haul. Still, the short-term headwinds in Macau can’t be ignored. Here are two casino stocks to play — and two to stay away from now:
Play: Wynn Resorts (WYNN)
Wynn Resorts (WYNN) gained nearly 6% on this week’s earnings news — particularly since the company showed strength in Las Vegas operations as Macau’s hot growth cools down. Given WYNN’s heavy exposure to Macau, a slowdown in gaming revenue there should have hammered earnings.
Lady Luck was on WYNN’s side, however, as revenue at its Las Vegas properties surged. WYNN’s earnings, released on Tuesday, beat the Street delivering $2.11 per share. Analysts had only expected $1.95. WYNN’s $1.41 billion in revenue missed slightly, but it could have been worse. Revenues surged more than 12% at WYNN’s two Las Vegas properties, while revenue from its Macau properties managed to grow by a little more than 3%.
The company operates Wynn Macau and plans to open its new Wynn Palace casino resort on the Cotai strip in 2016. WYNN has been able to offset the slowdown in China’s VIPs with broader mass-market gaming gains in Macau; its solid diversification combined with resurgence of the Las Vegas market give WYNN a strong hand to play even in the near term. The 2.5% current dividend yield looks attractive, too.
Play: Las Vegas Sands (LVS)
The challenges and opportunities for Las Vegas Sands (LVS) are similar to WYNN’s — decline of VIP gaming, but stronger mass-market revenue in Macau and strong revenue growth at Las Vegas properties.
LVS took a slight hit earlier this month after its earnings missed Wall Street expectations. LVS delivered earnings per share (EPS) of 85 cents, compared to analysts’ expectations of 89 cents; revenue in the quarter came in at $3.62 billion. Despite the report, there was a lot of great news buried in those earnings — including a 27% increase in net income and large revenue gains in Macau’s mass-market gaming.
LVS has a price to earnings growth (PEG) ratio of only 1.06 and trades at around 17 times forward earnings — attractive valuations within the gaming sector. This casino stock also has a 2.7% current dividend yield and LVS management has a good track record of dividend increases and share repurchases. LVS stock is down about 6% year to date and the pullback makes it look more attractive than most of its sector peers from a valuation perspective.
Stay Away: Melco Crown Entertainment (MPEL)
When Macau was generating 35% revenue growth, Hong Kong-based Melco Crown Entertainment (MPEL) was a super play on the white-hot market. MPEL’s valuation remains attractive: a PEG ratio of 0.7 and a forward P/E of less than 17 suggests the stock is slightly undervalued now — and the 1.5% current dividend yield further sweetens the pot.
That said, MPEL stock is down by nearly 16% year to date, weighed down by slower gaming revenue in Macau. MPEL has a lot riding on its super luxe properties on Macau’s Cotai Strip, and continues to develop new high-end casinos like Studio City. But while its heavy focus on Macau drove magnificent earnings growth, MPEL remains more vulnerable to lower VIP play and slower growth in China’s economy — a big deal since gaming junkets from mainland China have fueled its fortunes.
I think the Macau headwinds will cause a further pull back in MPEL stock, at least for the next quarter.
Stay Away: Caesar’s Entertainment (CZR)
Since Caesar’s Entertainment (CZR) missed out on the Macau boom but has strong properties in Las Vegas, the lackluster performance of this casino stock (down 35% year to date) seems curious — until you examine the fundamentals. The first thing to notice is total debt of more than $22 billion. The second is CZR’s heavy presence in Atlantic City, a once-booming East Coast market that has gone bust since new casinos have been approved in other states like New York and Pennsylvania.
CZR is a huge player in Atlantic City, but it will close its Showboat casino in mid-September. Atlantic City is not the only stressed gaming market for CZR, though; the company shut down its Harrah’s casino in Mississippi in June. Although CZR stock got a shot in the arm from a $1.75 billion refinancing approval from the state of Illinois, Caesar’s is still in a tough spot. There are much better gambles out there.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.