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Now that gaming earnings are complete for the second quarter of 2011, it’s time to figure out which company is giving investors the best odds right now.
Thankfully, most of the build-out of Macau is complete, so it’s much easier to compare companies than when new casinos were waiting in the wings. Las Vegas Sands (NYSE: LVS ) still has Sands Cotai Central waiting to be opened next year, but as the biggest operator, the new casino’s impact will be smaller than previous openings. Melco Crown (Nasdaq: MPEL ) , Wynn Resorts (Nasdaq: WYNN ) , and MGM Resorts (NYSE: MGM ) all have developments on the Cotai Strip waiting to be built, but they’re years away from making an impact.
So how do we decide who is best? I’ve calculated the enterprise value (EV) for each company by adding the market cap and net debt for each company. Then I’ve divided that number by the adjusted EBITDA for each company over the last 12 months, giving us an EV/EBITDA ratio.
Market Cap (in billions)
Net Debt (in billions)
|Las Vegas Sands||$31.77||$6.4||$3.03 billion||12.41|
|Wynn Resorts||$17.34||$1.46||$1.49 billion||12.46|
|Melco Crown||$6.52||$1.29||$624 million||12.87|
|MGM Resorts||$5.00||$11.91||$1.35 billion*||12.50|
* MGM’s EBITDA includes only the portion owned by MGM. TTM = trailing 12 months.
These are remarkably similar ratios for the four companies and show that there may not be one company that’s vastly undervalued right now. But let’s eliminate one from contention right away. Considering MGM gets most of its EBITDA from Las Vegas, which is growing much more slowly than Macau, there’s no way MGM deserves the same multiple as the other three companies.
MGM Resorts, you’re fired.
Above I’ve focused on companies with casinos in Macau, but there is at least one U.S. company we shouldn’t overlook.
Penn National (Nasdaq: PENN ) grew revenue 15% in the second quarter and earnings per share took a giant leap forward. Management has also made all the right moves in Las Vegas, practically stealing M Resort last year. With an EV/EBITDA ratio of 7.2, Penn provides a nice value with growth opportunities ahead.
Locally, Penn is definitely stronger than competitors like Isle of Capri Casinos (Nasdaq: ISLE ) or Boyd Gaming (NYSE: BYD ) , which are still posting losses, but let’s be honest, the U.S. isn’t Asia. If you want a home-grown gaming stock, Penn National is your best option, but my money is staying overseas.
My Foolish pick
Right now it’s a tough choice between Melco Crown, Las Vegas Sands, and Wynn Resorts for the top stock in gaming. I’m going to eliminate Melco Crown first because it has the worst margins of the three and there’s uncertainty surrounding table games in its Studio City development. With that said, Melco probably has the most upside potential if it can improve margins, add table games to Studio City, and improve gaming revenue with Sands Cotai Central opening next door. I just don’t like the odds of that bet right now.
While I like Wynn’s progress in both Macau and Las Vegas, where it is taking share like crazy, I am going to have to give the edge right now to Las Vegas Sands. Sands still has tremendous potential to grow in Singapore and Sands Cotai Central, which will add to revenue in Macau. If CEO Sheldon Adelson can sell the non-core assets in either Macau or Singapore in coming years, that would also be a bonus for shareholders.
What do you think? Is Las Vegas Sands the best stock in gaming, or is this Fool off his rocker? Leave your thoughts in the comments box below.
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