Casino stocks have just been hammered over the past year or so. Las Vegas traffic has been OK, but not great. Macau had been expected to be explosive for everyone, but then the Chinese government started cracking down on corruption.
The result was all the whales that were expected to float into Macau casinos are running for the hills instead.
The casino stocks were seeing year-over-year revenue declines of 17% to 24% on the VIP side. Worse, Macau isn’t turning into the tourist attraction everyone hoped it would be.
It’s a frustrating situation because casino stocks can be amazingly lucrative. They have continued to surprise me as far as how much the market bids them up when there’s even a little bit of optimism. I thought a couple of these casino stocks might be dead five years ago, and yet they roared back.
Which of these three are worth buying, now that they’ve all been sold off so badly? Let’s look at three:
3 Casino Stocks to Hold or Fold: Las Vegas Sands (LVS)
Las Vegas Sands (LVS) seems to have the upper hand these days as far as casino stocks. I never really gave LVS stock much attention and in the process, I lost track of the fact that it’s really the most geographically diverse operation.
Macau has been imploding for all casino stocks, and revenue there was down in the last quarterly report. However, LVS stock did quite well in all its other regions. It has a strong presence in Singapore, where revenue was up big-time year over year, and adjusted property earnings before interest, taxes, depreciation, and amortization (EBITDA) also grew.
Even the little operation in Pennsylvania saw a revenue increase. Overall, it’s just been performing pretty well.
I think it’s possible that both the Macau and Vegas bottoms are in for casino stocks. LVS is 10% off its 52-week low, but 30% off its high. Even these bad times still generate good free cash flow, over $3.2 billion in the last 12 months. It trades at an enterprise value/EBITDA ratio of 10.25.
3 Casino Stocks to Hold or Fold: Wynn Resorts (WYNN)
Wynn Resorts (WYNN) had always been my sector favorite, but WYNN stock got too bogged down in Macau. Being less diverse than LVS stock, it saw massive cuts in revenue and then learned its Cotai resort would have a delayed opening.
Then Steve Wynn’s ex-wife started causing trouble for the board of directors, and sentiment got hurt even more.
I always found it hard to bet against Steve Wynn, and I still do. Yet when the stock broke through support at $140, where I’d considered buying in, it kept dropping into the high $90s and I stayed on the sidelines.
The thing about Steve Wynn is he knows this business better than anyone, but as we’ve seen from the stock’s roller-coaster ride over the past few years, WYNN is a trading stock. It is also valued at an EV/EBITDA ratio of 11.6 so it’s more expensive on a relative basis than LVS.
3 Casino Stocks to Hold or Fold: MGM Resorts International (MGM)
MGM Resorts International (MGM) has confounded me for some time.
It has lots of great properties. It got trapped in its massive City Center project just as the financial crisis hit, so its been weighed down by $13 billion in debt, sucking out $817 million in interest payments last year. It loses money every year, yet managed $250 million in free cash flow in 2014.
And yet the stock broke out from $10 about three years ago and hasn’t looked back. It even got to $27 before settling here at $20. I don’t get it.
Then things got weirder when rumors started swirling of a merger between MGM and WYNN. I just do not see that happening. Wynn has made many deals over the years, but why would he merge his baby with an anchor like MGM stock?
3 Casino Stocks to Hold or Fold: The Verdict
So what’s the play? I think you have two choices.
You can buy LVS stock for the long term, coming off a low, and set a stop loss at $45. You can buy WYNN stock now for a long-term trade, with a stop loss at $89 or so.
I have done the latter, and may buy a long-term out-of-the-money call for less than $700 if I can. I’d stay away from MGM.
As of this writing, Lawrence Meyers owned shares of WYNN.
