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When Will Casino Stocks Come Back to Life?

Casino stocks have been smashed by China's crackdown on Macau

Casino stocks have fallen through a trap door. The industry’s biggest players, Las Vegas Sands Corp (LVS) and Wynn Resorts, Limited (WYNN), along with others, have seen their shares drop sharply.

lasvegassands185Investors in casino stocks wonder when these stocks will rebound.

LVS stock dropped 36% since March, when it reached more than $87 a share. It traded recently at $55, at 16 times earnings. In the same period, WYNN stock fell more than 40%, from $246 to below $145, and now carries a price-to-earnings ratio of 17.

WYNN stock and LVS stock posted terrific gains since the end of the recession. WYNN stock rose from $70 to its high of $249, while LVS stock rose from a modest $15 all the way to $87.

The gaming industry hummed along.

But in the last year especially, casino stocks have fallen as their growth story has cooled. The story for most of the growth was a China story — mainly, Macau. So, too, is the story of the cooling off.

WynnResortsPromoMacau and Casino Stocks

China’s government encouraged the growth of gambling on its peninsula of Macau. Casinos rushed in, including LVS, WYNN, MGM Resorts International (MGM) and Melco Crown Entertainment (ADR) (MPEL). Macau dramatically expanded the revenue and earning universe for casino stocks.

For its recent quarter, LVS reported $2.3 billion in net revenue from China operations out of total net revenue of $3.5 billion. LVS grew net revenue from $9.4 billion in 2011 to $13.8 billion in 2013. Earnings jumped from $1.6 billion to $2.3 billion in the same period.

WYNN’s most recent quarterly earnings report in October showed net revenue of $1.37 billion, with $942 million of that from its Macau operations. WYNN stock’s results have been more modest than LVS stock’s in the last couple of years, but it still grew revenue from $5.2 to $5.6 billion and earnings from $613 million to $729 million.

This was as Macau became the Asian, if not global, gaming mecca. High-rollers from Hong Kong, mainland China, Japan and the rest of Asia flocked to the gambling tables of Macau. Money poured into the casinos as investors poured money into casino stocks.

China’s Reversal

Although China reaped much of the economic benefit of the rich bounty of Macau’s gaming boom, China’s President Xi Jinping began a crackdown on corruption just as China’s economic growth was slowing. For Macau, this meant the government began restricting VIP high-stakes gamblers by limiting junkets.

With a less robust gaming climate, revenues in Macau have declined for five consecutive months, including a 20% drop in November. As revenue has fallen, investors have fled casino stocks.

Casino 1 year charts 12-16-14 big

Have Casino Stocks Hit Bottom?

A recent Wall Street Journal article cited largely negative analyst opinions on casino stocks. With gaming revenue down the past five months and no immediate upturn in sight, it looks like casino stocks still have a bit more to go on the downside. When revenue declines stop, that’s when casino stocks are likely to finally find a bottom.

To reverse this trend, China’s government would have to relax its pressure on Macau. Casinos are still a good deal for China despite the money flights out of the mainland through Macau. And with large projects being built on the ultra-upscale Cotai area of Macau, the casino stocks are deeply committed, unofficial partners with China.

Casino stocks will begin to rise when their Macau gaming revenue rises again.

How to Play Casino Stocks

Although WYNN stock now carries a yield of 4.1% and LVS stock now yields 3.7%, with the valuations looking reasonable, investors should still wait before they buy casino stocks.

If you’re a fundamental, long-term investor, you’ll want to wait until the casino stocks stop falling before you initiate a position. If you’re holding shares already, then it’s a matter of pain tolerance. Short-term traders can trade bounces, but long-term investors and traders ultimately should wait until China’s government gives the “all clear” signal for Macau and casino stocks begin to rise.

As of this writing, Greg Sushinsky was long WYNN.

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