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.
|Las Vegas Sands
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.
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