This Is the Top Stock in Gaming

I'm back on the hunt for the best stock in gaming. Now that all of the major gaming companies have reported earnings for the fourth quarter, it's time to take another look at how the five companies stack up and which one should be in your portfolio.

Since I last analyzed gaming stocks after the third quarter, most stocks are up as growth has continued in both the U.S. and Asia. Melco Crown (Nasdaq: MPEL  ) , my top pick after the third quarter, has led the way, gaining 50.1% since the end of November; MGM Resorts (NYSE: MGM  ) followed close behind with a 44% gain; and Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (Nasdaq: WYNN  ) rounded out the group by increasing 25.6% and 9.7% in value, respectively.

Now, Caesars Entertainment (Nasdaq: CZR  ) has joined the fray, which makes the group even more interesting.

Speaking of value
As I usually do to analyze the value of these companies, I have calculated the enterprise value, which is the value of net debt plus the company's market equity value, and divided that by EBITDA for the last 12 months. This will give us a starting point for picking which stock is the best right now.

Company

Market Cap

Net Debt

EBITDA (TTM)

EV/EBITDA

Melco Crown $7.07 billion $1.17 billion $826.5 million 10.0
Las Vegas Sands $40.14 billion $6.13 billion $3.532 billion 13.1
Wynn Resorts $15.01 billion $1.96 billion $1.60 billion 10.6
MGM Resorts $6.70 billion $11.81 billion $1.68 billion 11.0
Caesars Entertainment $1.38 billion $18.90 billion $1.94 billion 10.4

Source: Company SEC filings. TTM = trailing 12 months.

The table above shows that every company except Las Vegas Sands is trading in a fairly small range of 10-11 times EBITDA right now. But I'm not taking Las Vegas Sands out, because it will soon grow EBITDA with a new resort in Macau, which we'll get to in a minute.

Based on this table, I am eliminating Caesars Entertainment from contention because the company's growth prospects aren't as strong as those of its peers, it doesn't have exposure to Macau or Singapore, and it relies heavily on the beaten-up regional gaming business. Buying Caesars over the others would be like buying a run-down Taurus when there's a Ferrari available for the same price.

While I'm not as negative on MGM Resorts, I will also take it out of consideration because its exposure to Macau is much smaller than the three companies we now have left, and its debt load is still massive.

Accounting for growth
The three contenders left are all heavily focused on the Asian gaming market, which is still growing more rapidly than anything domestically. But Las Vegas Sands is the only company that has a resort and casino under construction in this attractive market. The Sands Cotai Central development will soon begin opening in phases and will be a major addition to the company's financial results. If we estimate that this resort will add about the same in EBITDA as The Venetian Macau, based on more hotel rooms but fewer table games, this could add $1 billion over a full year. If I add this into the calculation above, I get an EV/EBITDA ratio of 10.2, very similar to those of Wynn and Melco Crown.

A neck-and-neck race
Unlike in quarters past, the differences between Wynn, Las Vegas Sands, and Melco Crown are razor-thin. Even their balance sheets are very similar, with debt at reasonable levels and ample cash.

Las Vegas Sands definitely has the best opportunity to grow if the Asian market continues to be strong. If Sands Cotai Central performs better than what I've modeled above, the company could be an even better value that it appears today.

Operationally, Melco Crown has the most room for improvement, providing upside opportunity. The company's margins lag behind those of both Las Vegas Sands and Wynn in Macau, and any improvement would go straight to the bottom line.

All three companies are also sitting on potential expansions in Macau that are in some level of limbo. Las Vegas Sands' Site 3 could probably be built first, but Sheldon Adelson hasn't seemed eager to push the development at this point. Melco's Studio City is far from a reality, and who knows when Wynn's Cotai expansion will come to fruition.

With all of these things considered, I'm going to give a slight edge to Las Vegas Sands over the other contenders for top gaming stock. The company's size and diverse revenue sources outweigh the potential advantages the other two have. I'll keep my outperform CAPScall on Las Vegas Sands to back up my pick on my CAPS page.

Without an obvious winner, I'm considering adding a long/short pairs trade to my portfolio by going long Las Vegas Sands and Wynn, and shorting Caesars and MGM. This would essentially be a bet on Asia over the U.S. gaming market, a bet I would take any day.

Interested in reading more about gaming stocks? Add them all to My Watchlist, which will find all of our Foolish analysis on your favorite stocks.

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.

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Read/Post Comments (3) | Recommend This Article (3)

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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 March 12, 2012, at 8:06 PM, cp757 wrote:

    Travis you are starting to say all the right things about Las Vegas Sands. That's great. I knew you always have loved LVS you just thought WYNN would still be a player.They won't. Wynn also has more real debt than you state but for now we will overlook that just for arguments sake. This Okada vs Wynn issue is still going to cost investors a lot of money. Almost everyone is minimising the problem and I think the scutany will reduce the number of customers he gets and the junket operators will line up to get into Cotai Central. Steve Wynn will lose market share in the old Macau all this year. I am still sensing you miss this market share issue between Cotai Central, WYNN and MPEL. The new Cotai Central will take market share from MPEL and WYNN every month going forward. Its new and it will be the only place for the gambler to go. When you go to Vegas do you want to stay at The Venetian or Circus Circus ? It will be the same in Macau so with WYNN being in the old Macau he will be like Circus Circus and lose market share to Cotai Central every month. The only thing that might happen is MPEL might get a small increase from the added rooms in Cotai Central but everyone will be taking market share from the old Macau. When you see a sequel to that great movie "Con Air" when the former US Ranger Nicolas Cage finds himself trapped in a prisoner transport plane that crashes into the Casino Lisboa and then hits the Wynn Macau . I will start looking for them to start to tear down the old casinos in Macau to put up the new. If they did that I would start to bet on the old Macau. Until then I think I will bet on Cotai Central the biggest gambling enclave in the world.

  • Report this Comment On March 12, 2012, at 9:37 PM, mountain8 wrote:

    "Its new and it will be the only place for the gambler to go. When you go to Vegas do you want to stay at The Venetian or Circus Circus ?"

    What a statement. New means nothing to anybody other than curiosity. Gamblers go to where they think they can win.By the way if you go to vegas in April/May, both Circus and Venetian will be packed. One just costs more.

    When I go to vegas I stay anywhere that offers me a deal. I have stayed at Ceasers, Venetian, Paris, Circus Circus and three places downtown. If you are making a prediction based on personal taste and budget, you need to rethink.

    By the way I own Both LVS and Mpel and am up a BUNCH (Mpel at <$3.)

    PS, I could have sworn Cage crashed into Las Vegas rather than Macau.

  • Report this Comment On March 12, 2012, at 10:11 PM, cp757 wrote:

    mountain8

    MPEL sold for 2.83 on 03/09/2009 and is today at 13.27 and that's a great profit in that amount of time over a 450% increase. Your LVS is a lot better. If you bought on the same date you could have paid 1.38 and any amount of money that you paid would have given you a 72% return on the money you invested 36 months earlier, and that's just on the dividend, and over a 3,500% increase in your stock price. That means you did a lot better on LVS. In Macau they have a lot of high rollers that drop millions at the best show in town but they wont go to a cheap casino. In the US we have gamblers that want a good time and a great value so we have a place for Circus Circus. That's why you have done so well on your Las Vegas Sands. That shows you not only know a good value your a smart investor.

    PS mountain8 Cage did crash into Las Vegas rather than Macau but I was talking about a sequel that would tear down the old Macau and start to build the new Macau just like the old Vegas was torn down .

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