Who Is the King of Gaming: Las Vegas Sands or Melco Crown?

Over the last three years Las Vegas Sands (NYSE: LVS  ) and Melco Crown (Nasdaq: MPEL  ) have paced the growth of the gaming industry. New resorts in Macau and Singapore have helped grow revenue more than 100% over that time and both companies have turned dire situations at the height of the recession into wildly successful businesses.

MPEL Revenue Chart

MPEL Revenue data by YCharts

The question we ask today: Which stock will be a better investment for investors over the next three years?

You get what you pay for
Before we dive into advantages and disadvantages of each company, let's take a look at how the market values them. Using the enterprise value/EBITDA valuation method, you can see below that Melco Crown appears to be much less expensive than Las Vegas Sands currently.

Company

Market Cap

Net Debt

EBITDA

EV/EBITDA

Las Vegas Sands $31.3 billion $5.8 billion $3.9 billion 9.96
Melco Crown $5.6 billion $874.7 million $930.7 million 6.96

Source: Company filings.

The one thing that this trailing ratio does not consider is Las Vegas Sands' Sands Cotai Central, which is currently in the midst of a phase opening. If we project $1 billion in EBITDA for this property, similar to its neighbor The Venetian Macau, the ratio falls to a much closer 7.64. Based on this, it looks like the companies are fairly similarly valued when accounting for fully built-out resorts, with maybe a slight advantage going to Melco Crown before we know exactly how Cotai Central will perform.

To put these incredible values into perspective, both companies' total enterprise values/EBITDA ratios are lower than highly leveraged Caesars Entertainment's (Nasdaq: CZR  ) debt/EBITDA ratio alone.

Now that we understand where valuation lies, let's look at the advantages and disadvantages of each company.

Las Vegas Sands advantages
As the largest and most valuable company in gaming, Las Vegas Sands owns some of the best properties in the industry. Marina Bay Sands is the company's crown jewel that grew revenue 45.1% and EBITDA 66.1% in the first quarter. The resort could very easily pass $2 billion in EBITDA during 2012 alone.

Las Vegas Sands also owns three properties in the heart of Macau's Cotai Strip. We've seen gaming trending toward the Cotai Strip, which has benefited Las Vegas Sands and Melco, while taking growth away from Wynn Resorts (Nasdaq: WYNN  ) and MGM Resorts (NYSE: MGM  ) in recent quarters. As Sands Cotai Central is completed, the trend toward Cotai will likely continue.

Sands also has the capability to build much larger resorts than Melco Crown, something it is looking to do in Spain. If markets like Japan or Spain indeed open up, Las Vegas Sands will have a clear advantage in these new markets.

Las Vegas Sands disadvantages
The biggest disadvantage for Las Vegas Sands in this battle is sheer size. Resorts that will add 20% or more to EBITDA are few and far between, and after Cotai Central the company just doesn't have growth prospects outside of organic growth right now. Lot 3 on Cotai is the company's only potential resort in the pipeline, and it looks like Galaxy and Wynn are jumping ahead of Sands in building their resorts on Cotai before Sands gets to Lot 3.

Investors should also be looking with a close eye at Singapore, where officials are trying to crack down on problem gambling and are looking to increase their ability to fine gaming operators for violations. The Casino Regulatory Authority in Singapore could get approval to fine companies 10% of annual gaming revenue for violating laws that limit who can be allowed to gamble, something Sands has been fined for before. If fines increase that much, you can bet the company will do everything it can to avoid any violations.

Really, there aren't any glaring red flags for Las Vegas Sands. The company has an outstanding lawsuit with a former executive, but it's unlikely to impact operations. The biggest question is how much the company can grow in coming years.

Melco Crown advantages
Melco Crown has two main advantages over Las Vegas Sands from an investor's standpoint. The company is smaller and therefore has more upside with the addition of another resort. It also has lower margins, which provide the company with significant operational upside.

The company's size means the $1 billion resort in the Philippines that the company just signed on as a partner has the potential to make a big impact on earnings. The company will invest up to $580 million in the project, and if the area's gaming revenue reaches $3.0 billion by 2015, as one analyst predicted, it will be a big move for the company. Melco also has a majority stake in Macau Studio City, although that projects sits in a similar position to Lot 3.

The margin upside Melco has is significant as well. In the most recent quarter, the company's EBITDA margin was 27.6% versus 36.5% at The Venetian Macau. Melco has steadily improved margins in the last two years and further improvement will go straight to the bottom line.

Melco Crown disadvantages
One of Melco's advantages is also its disadvantage, and that's margins. The company simply isn't as operationally efficient as Las Vegas Sands right now. I highlighted the 8.9% EBITDA margin deficit the company has versus Las Vegas Sands. That's a large gap to make up.

Melco is also dependent primarily on City of Dreams for its earnings. This has been good so far because the resort has performed well, but any decline in the Macau market would send Melco into a tailspin. Las Vegas Sands' more diverse operations should keep the company's profitability more stable and give investors a less volatile investment.

And the winner is...
The race between these two is tight, but the recent deal in the Philippines has pushed me over to the side of Melco Crown in recent days. The deal will give Melco another prospect for growth in a market that could actually take business from Singapore and Macau. The lower valuation is also a factor in my pick.

For more risk-averse investors, Las Vegas Sands would be a good pick. I'll keep outperform calls on both stocks right now though because I think gaming will continue to grow and both stocks provide nice value to investors.

While both of these stocks have been multibaggers in recent years, our analysts have found another stock that fits the mold. In our special free report entitled "Discover the Next Rule-Breaking Multibagger," they outline the pick and why it is breaking all the rules of its industry. Find out which stock this is today by clicking here.

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 (8) | Recommend This Article (3)

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 July 11, 2012, at 2:39 PM, MutualFundMonday wrote:

    Debt MPEL is raising for MSC was left out.

  • Report this Comment On July 11, 2012, at 3:49 PM, spokanimal wrote:

    Travis, I've spoken before in commentary to your articles of what I believe the impact will be on Venetian as a result of having Cotai Central just across the street from it. IMO, the boost in business as C.C.'s 6,000 hotel rooms feed Venetian's expansive ancillary attractions will be very significant...

    ... yet I notice that your comment about cotai central being "similar to its neighbor The Venetian Macau" pretty much avoids this line of thinking and treats Venetian as though it's performance will be static as cotai central increasingly opens and complements Venetian.

    Secondly, I would also point out that Sand's lot #3 is already under construction and will be working on pilings and foundation work (which is arguably the most significant part of any development on the cotai "landfill") for the remainder of the year.

    If lot #3 were to get it's design approved by december, then it's construction timeline wouldn't miss a beat and they already have much of the scarce construction labor they need over at CC.

    Although the SAR government could conceivably approve land grants for SJM and MGM ahead of cotai lot #3's design approval, it doesn't negate the fact that Sands already owns lot #3 and, on paper, a design approval is minor compared to the gazetting process.

    Spokanimal

  • Report this Comment On July 11, 2012, at 4:37 PM, JF125780 wrote:

    Travis and Spokanimal

    The article and the comment is very informative, but as a long time investor in LVS I find the biggest problem is that Sheldon and the insiders are taking multi millions out of the company in bonuses and etc..

    Why don't they give the stock a chance to grow and let the shareholders show a profit.

    At he inception in Novermber of 2004, I paid $45.00 a share.

    Danny Kowkabany

  • Report this Comment On July 11, 2012, at 4:58 PM, cp757 wrote:

    Travis you get better all the time but I always like to add something to your figures. You say "Lot 3 on Cotai is the company's only potential resort in the pipeline," That's not true and I know you don't want to get anyone excited about Barcelona but I have already planed my vacation to the new Integrated Resort. Two weeks at Adelsons resort with warm days in the Mediterranean breeze and gambling and drinks and shows at night. Then a one week Cruise on the Mediterranean,

    The spots you forgot where the 1500 rooms at the Marina Bay Sands and all the resorts that Mr Adelson will build that politicians in those countries are dragging their feet. This is from the Las Vegas Sands web site"

    "Las Vegas Sands has a disciplined execution of our Global Growth Strategy. Our Development Opportunity Parameters are : Minimum of 20% return on total investment capital and 25% to 35% of total project costs to be funded with equity--project financing ( 65%-75% of total project costs) in place before construction. The Expansion opportunity's are :"

    Macau Parcel 3, will have 3,600 rooms added

    Singapore MBS expansion project, will add 1500 rooms to the Marina Bay Sands before anyone finishes in Macau.

    Spain, over 18,000 rooms and three casinos in the next 4 years

    Canada,

    Vietnam,

    South Korea

    Japan.

    That means LVS will have continued growth and 23,100 rooms in the pipeline over the next 4 years . No other company in the sector has anything like this.

  • Report this Comment On July 11, 2012, at 5:54 PM, TMFFlushDraw wrote:

    @MutualFundMonday

    I'm only using previous quarter numbers. Both cash, debt, and EBITDA will change in coming quarters but I am not projecting debt or cash changes and don't normally project EBITDA in my analysis (exception for Cotai Central, which is open).

    @spokanimal

    What you say about The Venetian Macau could also be said about City of Dreams. Both are adjacent to Cotai Central and both should benefit. This is why I left it out of the discussion. Will Venetian benefit more? Maybe, but we're talking about mass traffic that has very little impact on earnings.

    @spokanimal and @cp757

    All I consider in relation to Lot 3 and Studio City at this point is the things we know. We know that LVS has a construction deadline that it won't hit. It MIGHT get an extension and MIGHT open about the same time as Wynn, but we don't know at this point. I would like more clarity from LVS about the project but it hasn't been a focus in recent conference calls. Remember that LVS spent over $100 million on Lots 7&8 only to give them up under similar circumstances. The same MIGHTs could be placed on Studio City for MPEL. Construction has started and MAYBE it'll have table games, but we don't know. In fairness to both companies I mentioned both but didn't point them out as huge growth in the future. If both are built it will impact MPEL more though.

    Singapore expansion: This isn't a done deal is it? I know they're lobbying for it but this is anything but a done deal. Again, this is why I left it out.

    To be continued...

  • Report this Comment On July 11, 2012, at 5:58 PM, TMFFlushDraw wrote:

    As for Spain -- They don't even have a location. How could you project that anything will be open in four years? Plus, we don't know the design, phase budget, regulations, etc. LVS has a good track record with these projects but we don't know much about the project at this time.

    Now to my opinion on Spain -- I've said this briefly on this site but I'm leery of the Spain development. Putting billions of dollar into a country with 25% unemployment is questionable to me. Plus, it isn't like gambling is anything new in Europe. Casinos dot the entire continent. Macau and Singapore have billions of people in a booming economy to draw from and Europe has far fewer people in a bankrupt economy.

    This doesn't seem like a sure thing to me. Plus, it's not a done deal. My 2c.

    Travis Hoium

    PS. It'll take years to figure out if Adelson is a genius in the Spain expansion or not. He has a good track record, which counts for something.

  • Report this Comment On July 11, 2012, at 6:54 PM, cp757 wrote:

    Travis thanks for the response. I get carried away on this sometimes. This is all about growth.

    Gambling is a major revenue spinner globally with the legal gambling market totaling over 400 billion dollars. H2 Gambling Capital ranks nations in terms of gambling losses per adult in different countries.

    Austrailia is the number one gambling spot in the world based on amount gambled per person at $1,199 dollars. 2) is Singapore at $1,093 dollars . 3) is Ireland at $547 dollars . 4) Canada at $528 dollars. 5) Finland at $514 dollars 6) Italy at $481 dollars 7) Hong Kong at $468 dollars 8) Norway at $416 dollars 9) Greece at $391 dollars and 10) Spain at $389 dollars.

    In terms of gambling losses, Spain is followed by Sweden, Denmark, United States, United Kingdom and Japan, all of which have losses below $400 per adult.

    Ireland,Finland,Italy,Norway,Greece and Spain make up 60% of the top ten list and all are within a 1 hour flight of the Integrated Resort Sheldon Adelson will build in Europe.

    LVS has 2 locations on the top 10 with 60% of Singapore and 20% of Hong Kong - Macau.

    Of the top 10 he will have 8.

    To think that Europe is a bad location because of debt is like saying Las Vegas will do 3 billion this year because we only have 150 million people with jobs and 15.5 trillion in debt. Adelson is working with the 11 million millionairs in the world that go on very expensive vacations and the 171 million vacationers that go to Spain, Italy, and France are already spend money now. If Adelson gets 10% of those that come to vacation he would make 20 billion dollars. Singapore only gets 14 million visitors

    As to Barcelona: This link shows the new Height restrictions on the Barcelona project. Its 143 meters or 469 feet about the size of the Bellagio, Mandalay Bay or The Venetian. The old restrictions had it at 20 feet.

    http://territori.scot.cat/cat/img2/2012/05/eurovegas_3d.jpg

    Jun 25, 2012 El Prat de Llobregat (ACN). - Las Vegas Sands Corporation executives have visited the site where Delta del Llobregat studying install macrocomplex called 'Eurovegas. After landing in the corporate Prat terminal shortly before ten on Monday, about twenty men have moved to the area's natural Remolar first. Then rose to Montbaig to see an overview of Delta, and ended up visiting the walkway over the Llobregat Cornella in there, before leaving for Barcelona. A mobile device of the Autonomous Police followed the motorcade during his visit to the land. For the Government has accompanied the secretary of the territory and mobility, Damien Calvet.

    I dont know if this link will work but its Leven looking at the project.

    http://www.youtube.com/watch?v=irGEzePcmJo

  • Report this Comment On July 11, 2012, at 7:40 PM, cp757 wrote:

    Travis I know you know this but the thing that most people don't understand about The Marina Bay Sand is they have over 2500 rooms and they are 98% full all the time. Its not cheap to stay at The Marina Bay Sands and the mall will sell 132 million dollars in shoes, jewelry, and hand bags, that's 11 million a month.

    Millionaires go to Integrated Resorts that give them an Experience they can't get anywhere else. Contractors in Singapore will put up 10,000 hotel rooms in down town Singapore to take advantage of the growth in Singapore. The other resort is a long ways away and will not get those added rooms and that's why they are losing market share every month.

    They will never have the government build a 1 billion dollar garden next to them like Singapore did for the Marina Bay Sands to bring in 5 million visitors. They will never put in a ferry terminal like they did for the Marina Bay Sands. They have 200 thousand millionaires that live in Singapore now with another 200 thousand to be added in the next 2 years. That's growth.

    If only 30% of the 400 thousand millionaires that live in Singapore visit the Integrated resort and each spent 20,000 dollars ( just shooting low to make a point) you would have 120,000 millionaires spending 20,000 dollars, that's 2.4 billion dollars just from the local millionaires. That is growth and they will add 1500 more rooms and still have the 10,000 new hotel rooms.

    http://upload.wikimedia.org/wikipedia/commons/3/3e/1_singapo...

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