Gaming Stocks Are a Screaming Buy

"Be fearful when others are greedy, and be greedy when others are fearful." -- Warren Buffett

Following gaming stocks can lead to wild swings in both stock prices and emotion. In the last five years alone, we've gone from incredible highs, through near bankruptcy, to the solid recovery we're currently in. But fear has snuck back into the picture, primarily because of recent developments in Macau, and I think it's time to get greedy.

Is the boom over?
The latest numbers out of Macau show rapidly slowing growth, causing concern for investors. May gaming revenue grew just 7.3% from the year earlier after growing 20%-plus to start the year, and well over that rate for the last handful of years.

Source: Gaming Inspection and Coordination Bureau Macau SAR.

There's concern that slowing growth will continue long term because China's economic growth is beginning to slow, and high-net-worth gamblers may not feel confident enough in their economic futures to gamble away millions of dollars.

What we need to keep in mind is that growth is slowing, not stopping altogether. May's revenue was still the second highest on record, and trends show that we'll slowly creep higher for the rest of the year.

Value stocks emerging
For the two year I've been covering gaming stocks for The Motley Fool, these stocks have traded at a big premium to the market because of anticipated growth. The chart below shows the enterprise value/EBITDA value of gaming stocks over the last three years. As you can see, Las Vegas Sands (NYSE: LVS  ) in particular had to grow into its valuation by expanding its presence and growing at existing casinos.

LVS EV / EBITDA Chart

LVS EV / EBITDA data by YCharts

But now, gaming stocks have fallen far enough that I see a value play emerging. Las Vegas Sands, Melco Crown (Nasdaq: MPEL  ) , and Wynn Resorts (Nasdaq: WYNN  ) all have relatively low EV/EBITDA ratios, and their P/E ratios are far more reasonable than the nosebleed levels we saw for the last few years.

Company

EV/EBITDA

Forward P/E

Dividend Yield

Las Vegas Sands 10.5* 14.6 2.2%
Melco Crown 7.9 13.8 n/a
Wynn Resorts 9.4 14.5 2.0%
MGM Resorts 10.3 n/a n/a
Caesars Entertainment 10.5 n/a n/a

Source: Yahoo! Finance and company filings.
Note: Las Vegas Sands EV/EBITDA ratio does not include Sands Cotai Central.

Las Vegas Sands and Wynn both pay nice dividends, and from a value perspective, Melco Crown looks like the clear winner. Of course, this doesn't mean all gaming stocks are values right now. MGM Resorts (NYSE: MGM  ) and Caesars Entertainment (Nasdaq: CZR  ) not only don't provide good value from an EV/EBITDA perspective, they're laden with debt and are expected to post losses next year.

What to do now?
I think buying Las Vegas Sands, Melco Crown, or Wynn Resorts is a great value right now while the market is throwing these stocks out. Growth isn't over in Macau, and supply will stay constant until Wynn's new resort opens in 2016 at the earliest. This means that even single-digit growth will make its way to the bottom line at the few companies with resorts in Macau, and profitability will continue to improve.

I think Melco Crown is the best value right now, but I could make a strong argument for Las Vegas Sands as well. If you're new to gaming stocks, you may want to diversify with the two, giving you exposure to Macau's growth in Cotai, Singapore, and a splash of Las Vegas just for kicks. I already have an outperform call on Melco Crown, but I'm adding Las Vegas Sands to My CAPS portfolio right now to back up this pick.

For another great stock pick check out our report called, "The Motley Fool's Top Stock for 2012." The report is free; just click on the link here for access.

Fool contributor Travis Hoium manages an account that owns shares of Melco Crown and Wynn Resorts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (7) | 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 June 08, 2012, at 12:11 PM, cp757 wrote:

    Travis Las Vegas Sands is a screaming buy and I like the chart you put up but I think the best chart for an investor to look at is Net Income. That tells you the direction of the company and its competition. Market Share is the key and if you have the most hotel rooms in a market that is expanding you will have the most market share. Las Vegas Sands will have almost 13,000 rooms in Macau in the next 36 to 48 months and even when the competition opens in 2017 they will only have a small percentage of the rooms. In this chart on net revenue note the direction of the little lines, it gives you an idea of the stock you should buy.

    http://ycharts.com/companies/LVS/net_income#series=type:comp...

  • Report this Comment On June 08, 2012, at 5:00 PM, spokanimal wrote:

    Travis, re: your comment:

    "Growth isn't over in Macau, and supply will stay constant until Wynn's new resort opens in 2016 at the earliest"

    ... c'mon... you know better than that.

    How can you make a comment like that when Sands is in the midst of opening enough hotel rooms up this year and next to equal THREE, 2,000 room mega-resorts.

    You make it sound like Wynn is going to provide the next "supply" in macau... heck, Galaxy phase-II will likely open before Steve Wynn can find enough labor to build a $4 billion resort by 2016, at the earliest.

    That's not "constant", my friend.

    Spokanimal

  • Report this Comment On June 09, 2012, at 2:47 PM, cp757 wrote:

    No analysts seem to want to really tell the difference between the only two gaming companys in Singapore. This duopoly in Singapore is the fastest growing market in the world and is supported by the government with billions of dollars being invested to support the resorts. Resorts World at Sentosa has six hotels that offer a total of 1,840 rooms for accommodations and they had net revenue of $ 628.2 million dollars in the first quarter, down 33% from a year earlier. They have 10,000 employees about the same as The Marina Bay Sands. The big difference is The Marina Bay Sands had a 66% increase over last year to $ 848.7 million dollars and a 98.4% occupancy rate on 2,561 rooms. Resorts World at Sentosa got 42.5 % of the market share in the first quarter and they have nothing to show they wont lose more market share in the second quarter. I thing Las Vegas Sands will have another very good conference call in 6 weeks.

  • Report this Comment On June 10, 2012, at 6:43 PM, TMFFlushDraw wrote:

    @spokanimal

    Sands Cotai Central is already opening. I'm not counting them as added supply because the resort is already partially open. I was speaking of new resorts. I'll try to be more clear next time.

    I haven't seen a solid timeframe on either Galaxy or Wynn, but since Galaxy isn't US traded I focus in Wynn.

    Travis Hoium

  • Report this Comment On June 10, 2012, at 7:59 PM, ETFsRule wrote:

    You can buy Galaxy as GXYEF or GXYEY. I know most people don't like the OTC markets, but it is an option.

    I like Galaxy because they are a pure play on Macau.

  • Report this Comment On June 11, 2012, at 6:22 AM, ShockExchange wrote:

    Will Morgan Stanley And Revel Casino Symbolize Era Of Wall Street Greed And Profligacy? http://seekingalpha.com/a/duax

  • Report this Comment On June 11, 2012, at 12:24 PM, cp757 wrote:

    Travis I think the comparison of 4/5 star hotel accommodations in Macau is the question you are pointing out. How many will Steve Wynn have in 2012 and the answer is he will have 1014 rooms and the same number of rooms in 2013, 14, 15, 16, and 2017 because of labor shortages. That means Wynn Macau had 1014 rooms in March of 2012 and Sands China had over three times more with 3,568. Now lets look at the additions to Sands China that you say are all done and they have no additions going forward. They added 1,860 rooms in April of 2012 and then they will open another 1,829 rooms opening in the 3rd quarter of 2012. By the first quarter of 2013 they will have a total of 9,368 rooms in a market that will have a total of 23,695 rooms. With 9,368 rooms in 2013 they will have 40% of all the rooms but they are approved for 3,600 more rooms on lot 3 that could be finished by 2015 and that would give them 12,968 rooms almost 55% of the rooms in Macau but Wynn will have 1014 rooms not even 1/10th of the rooms LVS will have in Macau ,so Travis I find your comment about " I was speaking of new resorts" to be very misleading. The new casinos are Phase IIA then Phase IIB and Phase III and then Lot 3 so you have 4 new casinos opening in the next 36 to 48 months by Las Vegas Sands for a total of 12,968 rooms. Travis not counting Las Vegas Sands as added supply because the resort is already partially open does not tell the reader that they will have 55% of the rooms in Macau with 12,968 rooms. WYNN will still have 1,014 rooms in 2016 and less revenue because market share has moved to Cotai Central and WYNN is falling in share price because they have lowered margins to hold on to market share and they are still losing market share as of the first 10 days of June 2012 and LVS is adding market share in June and increasing Margins.

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