My never-ending quest to find the best bet in gaming continues, and now that we have third-quarter numbers reported, I can update my previously placed bets. Over the past year, I have ridden a wave higher in Melco Crown (Nasdaq: MPEL ) and seen value in Las Vegas Sands (NYSE: LVS ) , but recently the valuation of these stocks has changed the picture.
The market has had its eye on risk in recent months, so Melco Crown in particular has been beaten down because of its smaller, less diversified presence than competitors. Wynn Resorts (Nasdaq: WYNN ) has also fallen some, after a quarter that saw Macau revenue and EBITDA fall sequentially.
So where do we stand now?
Location, location, location
The search for the best stock in gaming is centered around gaming's hotspot, Macau. Sure, there are some reasonable U.S.-based stocks like Penn National (Nasdaq: PENN ) , but the majority of companies like Boyd Gaming (NYSE: BYD ) and Ameristar Casinos (Nasdaq: ASCA ) aren't even in consideration for best gaming stock. The real growth is in Asia, where the economy is stronger and casino supply is limited, so U.S.-based companies fall to the wayside very quickly.
So I'll focus on the four U.S.-traded operators in Macau: Melco Crown, Las Vegas Sands, Wynn Resorts, and MGM Resorts (NYSE: MGM ) .
Valuing gaming stocks
The best way to value gaming stocks is to look at how much cash their casinos are generating -- where we use property EBITDA as a proxy -- versus the value of the company. To value the company, I use enterprise value, or EV, which adds together market cap, debt, and subtracts cash on hand. Here is how these four companies stack up.
|Melco Crown||$4.74 billion||$1.23 billion||$728.7 million||8.19|
|Las Vegas Sands||$32.61 billion||$5.60 billion||$3.31 billion||11.54|
|Wynn Resorts||$14.04 billion||$1.33 billion||$1.60 billion||9.62|
|MGM Resorts||$4.75 billion||$11.84 billion||$1.35 billion||12.27|
Source: Company SEC filings. TTM = trailing 12 months.
When I did a similar analysis in August -- and concluded that Las Vegas Sands was the best bet in gaming -- the EV/EBITDA ratio for all three companies was nearly the same. Today, the picture has changed dramatically.
Melco Crown looks like far and away the best value among our Macau operators. Considering that EBITDA more than doubled at Altira in the third quarter and City of Dreams EBITDA grew 48% and both grew sequentially, I have to wonder what the market is thinking.
Melco Crown poised for growth
This is more than a value play because Melco's City of Dreams is parked in the middle of Cotai, the new center for gaming in Macau. Developments from Las Vegas Sands, Wynn, and MGM all surround City of Dreams and will do nothing but funnel patrons to the property.
The only downside of Melco Crown is that it doesn't have a major casino on Cotai in its pipeline. Las Vegas Sands will begin opening Sands Cotai Central in 2012, while MGM and Wynn will follow with new casinos. Melco owns 60% of Macau Studio City, but as of now, the development isn't slated for table games. But that gives investors some upside potential if Melco is able to add table games and another Cotai casino.
Foolish bottom line
Depending on your risk tolerance, Wynn Resorts also deserves a mention as a top gaming stock right now. Its 9.62 EV/EBITDA ratio is very attractive and the company pays a dividend so it has investors' interests at heart. If the company's Cotai development is as successful as Steve Wynn thinks it can be, the company should continue to shine.
But right now, Melco Crown tops my list of gaming stocks. I'm backing up my analysis by giving Melco Crown an outperform rating on My CAPS page. Over the next year I think the stock will beat the market and competitors in the gaming space. Follow the rest of my picks here.
Interested in reading more about gaming stocks? Add them to My Watchlist, which will find all of our Foolish analysis on these stocks.