The gambling industry looks to finally be recovering, and both Las Vegas Sands (LVS -0.37%) and MGM Resorts (MGM -0.33%) are benefiting as a result, though for different reasons. Because each casino operator has placed separate bets on the gaming market, investors will want to know which makes the better investment as the industry's rebound gains momentum.
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Operations matchup
Sands and MGM have their feet firmly planted in the two biggest gambling markets, Las Vegas and Macau, but that's where the similarities end. Sands is heavily invested in the Chinese enclave with 58% of net revenues derived from Macau -- a figure that's bound to rise as its newly opened Parisian resort begins making greater contributions -- while MGM generates most of its revenues, or 60% of the total, from Vegas.
While East and West both suffered flagging fortunes over the past few years, they seem to be on their way back to health -- though the recovery remains fragile. The gains in Vegas comes in fits and starts, and Macau is still under close watch by the Chinese government in Beijing. Just this month it changed the rules about how much money can be withdrawn from an ATM in Macau which sent casino stocks tumbling as fears of a new crackdown arise.
Although MGM Resorts will be finally opening its new Cotai resort early next year, Las Vegas Sands needs Macau to remain stable more than its rival because it has so much invested in the region. Macau has historically depended on the VIP gamblers who travel to the region, however reliance on this VIP market is unstable due to the threat of further regulation from Beijing.
Conversely, MGM is more geographically diverse. Although Vegas does account for the lion's share of its revenues, it also has operations in Illinois, Michigan, Mississippi, and Atlantic City, which represent 14% of its revenues. Moreover, it just opened the National Harbor resort in Maryland this month, it expects to open a casino in Massachusetts in late-2018, and it has a 76% stake in MGM Growth Properties (MGP), a triple-net lease real estate investment trust it created to hold properties like Mandalay Bay, The Mirage, Luxor, and Excalibur.
Valuation comparison
Las Vegas Sands is sizeably larger than MGM Resorts with a market valuation of almost $43 billion compared to its rival at $16.5 billion. And though Sands is cheaper than MGM on a trailing earnings basis, on next year's estimated profits they're comparably matched and their stocks trade at around 21 times earnings. While that points to there being little difference between the casino operators, analysts expect Sands earnings growth to remain virtually flat over the next five years while MGM is anticipated to increase by 34%.
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The future
How the recoveries shape up in Macau and Las Vegas will largely direct the relative strength of each casino, and both markets face risks of their own. Macau may feel greater pressure than its rival western city as Japan just legalized casino gambling in the country. There is still more legislation that needs to be enacted to authorize casinos, so years remain before a resort opens its doors, but MGM and Sands will likely be key players in the market.
That bodes ill for Macau, as Japan's gambling market is estimated to be around $40 billion, some 40% larger than the Chinese peninsula took in 2015. With fewer fears of government crackdowns, Macau could see the high rollers it's so dependent upon flee to Japan to gamble.
Certainly MGM Resort's REIT strategy holds risks as it increases expenses and lessens its ability to finance growth by taking on debt, but with a current ability to pay down existing debt and lighten its balance sheet, there just may be more upside.
The verdict
When looking at all of the above, it suggests MGM Resorts may just be the better bet than Las Vegas Sands. Of course, depending on how well you think Macau will recover compared to Las Vegas, it might sway you to lean in Sands favor, but I'd say the odds are in MGM's favor to generate greater returns for investors.
