Gaming Stocks Are Scorching Hot: Here's How to Play It

By Travis Hoium | More Articles
October 7, 2011 | Comments (1)

I hate to say I told you so, but I did. Gaming stocks were cheap last Friday when I wrote an article titled "Gaming Stocks Are Starting to Look Cheap." And earlier this week, I said the sell-off was still overblown, and soon gaming stocks would explode higher.

Gaming stocks have rocketed higher in the last two days not only because of hope that the worldwide economy wasn't heading into a tailspin, but because of the market realization that even slower growth wasn't all bad for Macau gaming. Sure, gaming may not grow in excess of 50% year over year, but that's an unsustainable growth rate for the long term.

The best stock out there today
Before the fall of gaming stocks in the last couple of weeks, my pick for the best stock in gaming was Las Vegas Sands (NYSE: LVS ) based on the company's growing business in Singapore and it owning the only casino opening in Macau in the near future. But Las Vegas Sands hasn't fallen nearly as far as Melco Crown (despite its pop yesterday), so the valuation of these companies has changed a little.

As I've done in the past, we'll use enterprise value/trailing property level EBITDA to determine value with gaming stocks. Here's how they stack up right now.

Company	Market Cap	Trailing Property EBITDA	Enterprise Value/Trailing Property EBITDA
Las Vegas Sands	$30.5 billion	$3.03 billion	12.2
Wynn Resorts (Nasdaq: WYNN )	$16.0 billion	$1.49 billion	11.7
Melco Crown (Nasdaq: MPEL )	$5.0 billion	$624.7 million	10.1
MGM Resorts (NYSE: MGM )	$4.5 billion	$1.35 billion	12.2

Source: Company releases.

As you can see the drop in shares of Melco Crown have made them much more attractive compared to Wynn Resorts and Las Vegas Sands. In the long term, each of these companies will benefit from growing gaming in Macau, but based on the company's smaller size and lower valuation Melco is starting to look like a great buy if the right opportunity arises.

When to buy
Melco's price is decent right now, but Las Vegas Sands isn't much more expensive when you consider the company's new casino in Macau and its growing operations in Singapore. However, a few days ago Melco's shares were trading as low as $7.32 per share, a steal in the gaming industry. If shares collapse below $8 again, I think that's a screaming buy considering Macau's continued growth.

The risk factor with Melco is its wild swinging margins in Macau compared with competitors'. Las Vegas Sands will be much more stable in the long term, but if the right buying opportunity presents itself Melco Crown can give investors great value despite the risk. Just make sure you're getting a good discount for the company's stock.

Interested in reading more about Melco Crown? Click here to add it to My Watchlist, which will find all of our Foolish analysis on this stock.

The Steve Jobs Betrayal
You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

Enter your email address below to find out what made Jobs so enraged!

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On October 10, 2011, at 11:23 AM, spokanimal wrote:

A better article than last week, Travis.
Something to consider re: LVS beyond your nod to the idea that Sand's Giant Cotai Central complex will be the only resort(s) that will open in Macau over the next 3 to 4 years.
Sand's revenue market share in Macau has been dropping for a year and a half... from roughly 22% to under 14% recently. Some of this is due to the company's relentless pursuit of high-margin business (mass, premium-mass, direct VIP and stingier comps). Most of it has been VIP business.
To rectify that (mostly due to Steve Jacob's gaffes), Sands has embarked on a $130 million VIP initiative that involves an expanded roster of junket aggregators and elaborate, made-to-order VIP suites. The initiative should have mimimal impact in Q3, more in Q4, and hit full stride in Q1. Aggregators have thus far spoken highly of the company's efforts.
So 2012 has 4, major calalysts for Sands:
1. Likely continued growth in Far East gaming.
2. The impact of the junket initiative.
3. The opening of Cotai Central
4. The impact that Cotai Central (and to a much lessor degree, Galaxy Cotai) will have on feeding Venetian's ancillary attractions and more fully absorbing under-utilized overhead there.
Re: #4, If Venetian can experience the 50% growth in mall revenues during the first half of 2011 that they did, imagine what that growth will be next year when the full impact of Galaxy's and Cotai Central's hotel rooms hit the strip...
... more than 150% more rooms will make a difference for those that "play where they stay".
Spokanimal

Add your comment.

Compare Brokers

Fool Disclosure

DocumentId: 1566396, ~/Articles/ArticleHandler.aspx, 5/26/2012 3:51:48 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 18 hours ago Sponsored by:
	DOW	12,454.83	-74.92	-0.60%
	S&P 500	1,317.82	-2.86	-0.22%
	NASD	2,837.53	-1.85	-0.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes