The Best Stock in Gaming

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.

Company

Market Cap

Net Debt

EBITDA (TTM)

EV/EBITDA

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.

Fool contributor Travis Hoium has sold put options in Melco Crown. 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 (9) | 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 Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2011, at 1:48 PM, NEMnyWtch wrote:

    Any thoughts on the private gaming sector stocks and legalized gaming in MA?

  • Report this Comment On November 29, 2011, at 2:48 PM, jallison4u wrote:

    Market is forward looking and that is why LVS has a higher EV/EBITDA. LVS is by far the best stock in Gaming. LVS has the only new gaming entry to Cotai for the next 5-years. Your analysis is just a snapshot in time. You can have MPEL. I will stay with LVS thank you.

  • Report this Comment On November 29, 2011, at 3:29 PM, TMFFlushDraw wrote:

    @NEMnyWtch

    I don't know much about the private gaming sector because their numbers aren't public. One of the big reasons I stay away from regional gaming operators is because states like MA keep opening up gaming, which dilutes everyone.

    My be a good idea for local areas, but it's not a great investment generally.

    @jallison4u

    Sands Cotai Central will be a blip for LVS at most. There aren't a lot of table games and the casino is relatively small.

    You can also look at revenue growth for LVS casinos versus MPEL casinos and see that traffic is trending toward MPEL in a big way. I'm not suggesting that LVS is a bad investment, only that MPEL is better for the reasons outlined above.

    You also have the size dynamic, LVS needs much more to grow than MPEL.

    If you're confident in your assessment do a long/short pair in My CAPS and see if you beat the market or not.

    Travis Hoium

  • Report this Comment On November 29, 2011, at 3:30 PM, cp757 wrote:

    I cant believe you could write this ,get a map,read articles,aaanaalizzze.

    You wrote

    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.

    Please tell me you have been to Cotai and just forgot what you saw if you didn't I included this link to remind you that this is Cotai Central envisioned by Sheldon Adelson

    http://youtu.be/PA8qILgcctQ

    Cotai Central is LVS and is the center of the action ,The Show,The whole cachunga,not a side show that will not come to the game for 3 to 4 Years

    From Wikipedia about the Cotai Strip // The project is funded by ,Las Vegas Sands which currently has a trademark application pending with the United States Patent and Trademark Office for the name "Cotai Strip".

    You need to do your due diligence or reveal short and long cash positions.No one should put any credence in your article.

  • Report this Comment On November 29, 2011, at 4:31 PM, TMFFlushDraw wrote:

    @cp757

    That's why LVS has a $32 billion market cap. But the fact remains that that Sand Cotai Central will only have ~500 gaming tables, just slightly more than Sands Macau, LVS's original casino.

    There is ~600 hotel rooms and 1.2 million feet of MICE, but that's not where the money is in Macau. The money is in gaming.

    The additional revenue will help, but not make up for a 30% higher EV/EBITDA value.

    As I've stated, I don't hate LVS, it's just that MPEL is a better stock right now.

    And what does LVS trademarking "Cotai Strip" have to do with anything?

    Travis Hoium

    PS. My short and long positions are fully disclosed. Please see our disclosure policy for more details.

  • Report this Comment On November 29, 2011, at 4:56 PM, cp757 wrote:

    .You said buy SATC down 86% TSI down 75% YGE down 70% FSLR down 69% TAN down 66% SPWRA down 64% ENOC down 62% NXPI down 54% NFLX down 47% and KNL down 29% Just to mention a few of your buys.You recommend MCRI at 11.74 and now its at 8.95. You need to stay away from the casinos

    The Las Vegas Sands will open 6000 rooms soon and no competition for years and they will have tables that 100 players will be able to play.The Macau government cant spend all the money coming in from the taxes.Las Vegas Sands is one of two gambling casinos in Singapore which will exceed the 34 casinos in Vegas in revenue in the next few years,not to mention possible expansion into Japan or Spain.When you invest find out where the money is coming from.MPEL please you just got done shorting it.

    From your years of playing Monopoly you should know you need to get the hotels on line with the most number of rooms and that is what Citai Central is all about . You do not know anything about MICE, gambling or the tourist industry.Find another sector that you know something about . Maybe engineering,you could try and find out for instance how the Marina Bay Sands had the heaviest crane lift in history,or the amount of fill it took to build Cotai out of a swmp.Your 96 rating is not impressive

  • Report this Comment On November 29, 2011, at 5:22 PM, cp757 wrote:

    In October you wrote

    The best bet in gaming, Las Vegas Sands (NYSE: LVS ) , showed yesterday exactly why it has the deck stacked in its favor. The company has the best properties, in the best locations, and is the best operator to boot.

    During the third quarter, that advantage helped send revenue 26.2% higher to $2.41 billion and adjusted property EBITDA to $924.1 million. Marina Bay Sands, one of just two casinos in Singapore, led the way with revenue climbing 63.1% to $792.4 million and property EBITDA exploding 71.3% higher to $413.9 million. That's an incredible 52.2% EBITDA margin.

    If I had listened to the Fool (I dont, I do my own research)I would feel that you changed your mind and feel MPEL is better but where are they going to grow revenue.

  • Report this Comment On November 30, 2011, at 11:46 AM, hulk04 wrote:

    Did you really think Cotai Central is opening only 600 rooms? And that there is only one casino in this project/development? How can your talk LVS and there is not mentioning Marina Bay Sands? Cotai Central will draw more gamers to the Cotai (away from peninsula) and the Venetian is the center of the Cotai strip (not Melco).

    Also, Melco purchases Studio City and now will invest money that will drive virtually no money to the top or bottom line (no gaming approved at this time and possibly none at all).

    Melco is a good play when the drop to single digits but overall best long term play in gaming has got to be LVS (only company with a pipeline)...

  • Report this Comment On November 30, 2011, at 1:53 PM, cp757 wrote:

    Las Vegas Sands has a tsunami of income coming on line in the next six months to a year and the market is pricing this in . If you do a comparison of MPEL,WYNN,and LVS over the last six months you will see the differance LVS is ahead . MPEL will be investing 1.9 billion into Cotai with no ability to build for the foreseeable future so the monorail from the main land will be dropping off the passengers to walk to the Sand. That will be the case for the next three years.Bridges will be built across the main avenue to increase foot traffic between the LVS properties.

    Another way to value stocks besides revenue is asset values and if Steve Wynn wanted to get into Singapore (which he has said he wants) he only has one way to achieve that goal and that would be to buy one of the two casinos that are allowed in Singapore in the next ten years.If he decided to buy the Marina Bay Sands would he have to pay 15 billion 20 billion 25 billion ?? Las Vegas Sands would not sell but its an interesting question.

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