A Casino Stock Worth the Gamble

The Parisian in Macau. Image source: Las Vegas Sands.

The gaming industry has been through a lot of turmoil in the past two years, mainly in the world's largest gaming market of Macau. Gaming revenue in Macau has dropped by half and as new resorts from Melco Crown (MLCO -1.45%), Las Vegas Sands (LVS 0.70%), and Wynn Resorts (WYNN 0.57%) have been completed, they have spread the revenue that's left among a growing number of resorts. And with MGM Resorts (MGM 1.09%) completing a project next year, the supply problem isn't over yet.

But declines in gaming doesn't mean casinos aren't spitting out cash quarter after quarter. In fact, there's some decent value in gaming stocks if you know where to look. Here's how the big four stack up right now.

Where casino operators stand today

Below I've outlined the market cap, net debt, and EBITDA for Las Vegas Sands, MGM Resorts, Wynn Resorts, and Melco Crown. EBITDA is a proxy for cash flow, so it gives us an idea how much money is coming out of the multibillion-dollar casinos these companies have built. On the far right, I've included a valuation metric of enterprise value, or market cap plus net debt, divided by EBITDA.

Data source: Yahoo! Finance and company earnings releases. MRQ = most recent quarter. TTM = trailing 12 months. Note: MGM Resorts results adjusted for $411 million gain on Crystals sale.

The first company to look at is Las Vegas Sands, which is one of the more expensive stocks and has little room for growth. The Parisian in Macau opened recently, but this adds to four resorts the company already has open in Asia, so even a successful opening will have little impact on the bottom line.

Melco Crown doesn't look very attractive because it doesn't have any new resorts on the horizon. Studio City opened last year and hasn't performed particularly well, so while the stock isn't expensive, it has little upside as competitors bring new resorts online.

That leaves Wynn Resorts and MGM Resorts, who until recently have both operated only a single resort in Macau. MGM Resorts is the cheapest by EV/EBITDA, and with a new resort in Macau opening next year, there's upside in shares. But even after MGM Cotai opens, the company will get most of its revenue in Las Vegas, so the upside is limited.

Wynn Resorts has incredible potential if Wynn Palace performs well, but being granted only 100 additional table games when the property opened will limit the opportunity. Still, the debt figure above includes the cost of building the $4.2 billion Wynn Palace and no EBITDA because the property opened in the third quarter. If we project just $500 million in EBITDA -- significantly less than neighboring resorts or Wynn Macau on the Macau Peninsula -- the EV/EBITDA ratio falls to 10.5. That presents upside if Wynn Palace performs well, but we won't have any operational figures for a few more weeks.

The top stock in gaming

From an upside perspective, Wynn Resorts is a good pick for investors if Macau recovers significantly in the next few years. But MGM Resorts is my top stock in gaming right now because it gets a majority of its revenue from Las Vegas, which is growing, and Macau is almost pure upside. That risk/reward profile is great for investors and makes this a stock worth betting on on today.