Reality Has Taken a Backseat in This Sector

If investing is considered gambling, then what exactly do you call investments made on companies that profit from gambling? There's a thought that'll have you losing sleep!

The gaming sector, primarily made up of Macau, Las Vegas, and Atlantic City, has seen one of the biggest about-faces in corporate history. While most casinos were nearly wiped off the map during the heights of the recession, many stocks are now making a full recovery from the lows of March 2009. But this turnaround is also my primary concern. Not only have certain casinos made a full recovery, but they are trading at valuations that predicate strong growth that simply isn't there.

Taking a look at the figures out of Atlantic City recently illustrates how weak the domestic gambling market is at the moment. Overall gambling revenue fell 5.9% for February over the year-ago period, according to the state Division of Gaming Enforcement. For the first two months of the year, revenue is down 6.6% from 2011. This is bad news for Caesars Entertainment (NYSE: CZR  ) , which relies on domestic gambling for 95% of its revenue. Mired under $19.8 billion in debt, Caesars' revenue in Atlantic City fell 7.7% in February, with Bally's dipping an even worse 10.4%.

In Las Vegas, things sound better than they actually are. In January, gambling revenue in Nevada hit $1 billion, which is 18% higher than the previous year. But before you go jumping for joy and betting your savings on black, keep in mind that Chinese New Year landed in January this year and had a major seasonal effect on gambling revenue. In actuality, slot revenue on the Strip fell 0.44% in January, signaling continued weakness.

Las Vegas Sands' (NYSE: LVS  ) recent quarterly report indicated a 9.3% rise in revenues for its Las Vegas properties, but baccarat, a game aided by Chinese New Year, accounted for much of that increase. For MGM Resorts (NYSE: MGM  ) , which reported its full-year results in late February, net revenue -- excluding the recently opened MGM China -- rose just 7%. MGM hasn't produced an operating profit since 2007, and according to Wall Street's estimates, it could be at least another two years before it does so again.

Macau continues to be the one bright spot for all casinos, with gambling revenue across the region gaining 22% in February and 47% in January over the year-ago periods. Wynn Resorts (Nasdaq: WYNN  ) posted a 9.1% revenue increase in Macau and has managed perhaps the best track record for sales growth in the U.S. Similarly, Melco Crown (Nasdaq: MPEL  ) saw its Macau casino revenue pop 35% in January.

But has excitement about Macau completely gotten the better of investors? I'm tending to think so.

Wynn Resorts has been the most consistent casino play, but even that looks pricey at 17 times book value. The other plays mentioned above look downright scary on paper. MGM has had several years of losses, Caesars is barely covering its interest payments, and both Las Vegas Sands and Melco Crown are trading at a brisk 37 times earnings. The growth in this sector simply doesn't match up with the values being assigned these stocks. Reality has indeed taken a backseat to Macau-mania, and I for one don't want to be around when double zeroes pop up on the investing roulette table.

Disagree with my bearishness on gaming? Sound off in the comments section below and consider adding these stocks to your free and personalized watchlist.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He always bets on black. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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Read/Post Comments (3) | Recommend This Article (6)

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  • Report this Comment On March 16, 2012, at 11:08 AM, cbotrader wrote:

    Good article.....even though I have been bullish and long LVS since it was under five, even have been liquidating here....these prices are starting to be very scary.

    You must take a profit BEFORE the tide turns....

  • Report this Comment On March 16, 2012, at 12:02 PM, cp757 wrote:

    Sean you are right about reality in this sector. Lets look at the reality the investor looks at. The enterprise value represents the entire economic value of a company. More specifically, it is a measure of the theoretical takeover price that an investor would have to pay in order to acquire a particular firm. WYNN's accountants have an Enterprise value of 17.51B. MGM's accountants have an Enterprise value of 18.36B. CZR accountants have an Enterprise value is 20.51B.How can that be with 22 billion in debt. The CZR accountants place Goodwill and other intangible assets at $8,120.700,000 billion. That should be zero. Now Caesars Entertainment will go from 125.34M Shares outstanding to 625.34Million Shares outstanding and 22 Billion In debt ? These phony books will end up having a class action lawsuit just like WYNN had announced on them . You said you had a problem with the reality and I agree but all stocks in the sector are not created equal .While Caesars and MGM are drowning in debt and Wynn is barred from expansion because of the SEC investigation and a shareholder lawsuit you do have a bright spot. You look at the past revenue and say the stocks are trading at a brisk 37 times earnings . The investor needs to know Las Vegas Sands is the only stock that is going to rip market share from its competition.We can look at Macau but lets start with Sands Bethlehem first. That location is in Pennsylvania and everyone wants to get in and Adelson is already there. They have taken market share from Atlantic city and are the number one casino in the state. Las Vegas Sands is in Singapore where they have only two casinos and they do more revenue than Las Vegas . They have 60% of that market. Growth is the point here and in Macau the new Cotai Central that opens in a few weeks will take more market share from all the competition in Macau giving it a 30% market share. Macau will do 40 billion dollars this year and you think the stock has a brisk value? You did talk about how good they did in Las Vegas so that's good but its growth and market share that you miss. Growth is the most important thing now and everyone talks about new projects they would like to do. Adelson is doing them. Most of the projects out there are just talk and are a long way off if they happen at all. Adelson will do a deal in Spain that will get started in the next 12 to 18 months and when its done will actually have flights from China to Spain as well as having the fourth largest Cruise Ship destination in the world. Seven million Cruise Ship passengers visit Barcelona every year. That's something a lot of people don't understand about Adelson. He is a Visionary that thinks outside the box. This new resort will have six casinos, 36,000 rooms and three golf courses. It will be the biggest Integrated Resort in the world and have 22 billion invested by all the company's that Adelson allows to join the project. He said its his biggest dream ever. Adelson will have the Master gaming license and have everyone that wants "in" to pay for the project so when its all said and done he gets the revenue while they pay for the project. The other thing I find amazing is he wants Spain to give him 2000 acres free and get a ten year pass on taxes . He says its 80% done and he should have the final details worked out in the next few months. I just wanted to add some reality to your story so a reader could understand the sector a little better.

  • Report this Comment On March 16, 2012, at 6:41 PM, spokanimal wrote:

    Sean: Although CP did a nice job of most of my point, I think it's fair to say that you did a nice job of discerning between the hot asian market and the lackluster U.S. market. The problem is, you didn't expound on "proportions".

    By that, I mean that it is relevant that Las Vegas Sands only derives 9% of their total revenues from Vegas... and 88% of them from Singapore/Macau... so when you discuss LVS, 88% of your point should be the far east, and 9% of the point you make should relate to Vegas.

    Also, as long as you're making that distinction, it doesn't hurt to augment your comment on 2012's macau gaming growth of almost 30% with a mention of the impending opening of LVS's massive Cotai Central development... and LVS's increase in macau gaming revenue share from 14% last September to roughly 19% now... even BEFORE Cotai Central opens the doors...

    ... IMHO, a 5% gain in LVS's share of a gaming market that's 5 times the size of Vegas strip is the best 5% of any market I'm aware of.

    Spokanimal

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