The Top Stock in Gaming

I'm back on the search for the top stock in gaming. The past three months have been eventful in the world of gaming, particularly in Macau. For the first time in recent memory, Macau's growth has fallen below double digits and came disturbingly close to declining in July.

So let's look at what's going on with gaming and who's dealing with it best.

What's up with Macau?
The problem in Macau is primarily in the hands of VIP players. These high rollers are brought in by junkets and play for a day or two at private high-limit tables, leaving gobs of money behind as profit for the casino. In general, about 70% of Macau's gaming revenue comes from these high-end players.

What's changed in recent months is that players have slowed down their play. Wynn Resorts (Nasdaq: WYNN  ) felt it, Las Vegas Sands (NYSE: LVS  ) experienced it on Cotai, and to a lesser extent Melco Crown (Nasdaq: MPEL  ) dealt with it.

Company

Q2 2012 Rolling Chip Volume

Change From Q2 2011

Q2 2012 Non-Rolling Chip Drop

Change From Q2 2011

Wynn Macau $30.3 billion (7.2%) $671.8 million (2.7%)
The Venetian Macau $11.2 billion (16.5%) $1.0 billion (0.3%)
Sands Macau $6.2 billion (20.5%) $717.1 million 0.5%
City of Dreams $19.1 billion (1%) $822.5 million 9.6%

Source: Company filings.

Even Marina Bay Sands' rolling chip volume was down 5.9% in the second quarter. Clearly, Asia's slowing growth is affecting VIP play, and it affected the profitability of gaming companies in the second quarter.

But as you can see, mass-market play isn't taking nearly the same hit. City of Dreams had a big increase, and losses in VIP play at the other resorts didn't translate to the mass-market side.

A look at value
With that backdrop in mind, let's look at what we're paying for each of these gaming stocks. I use a ratio that takes the enterprise value (which includes equity and debt financing) divided by EBITDA for each company. This allows us to consider debt and EBITDA as a proxy for the cash that is spit off by a casino.

Company

Market Cap

Net Debt

EBITDA

EV/EBITDA

Wynn Resorts $10.5 billion $3.3 billion $1.62 billion 8.52
Las Vegas Sands $35.1 billion $5.8 billion $3.80 billion 10.76
Melco Crown $6.6 billion $531.8 million $930.7 million 7.64
MGM Resorts (NYSE: MGM  ) $4.9 billion $11.9 billion $1.68 billion 10.03
Caesars Entertainment (Nasdaq: CZR  ) $917 million $19.0 billion $1.98 billion 10.02

Source: Company filings.

First off, we can eliminate MGM Resorts and Caesars Entertainment from the top-stock discussion. Caesars relies heavily on regional U.S. gaming markets, and most of these markets have been in decline. MGM is more Las Vegas-centric, which isn't a strong position, either, and while I don't hate the stock as much as I do Caesars, the debt load and relative value are enough to keep me out.

The three remaining companies are a little closer, but there's one big thing to consider. Las Vegas Sands is in the process of opening the second phase of Sands Cotai Central, which has contributed only $51.8 million of EBITDA to the results. In the past I've anticipated $1 billion in EBITDA from this resort, but considering the decline in EBITDA at The Venetian Macau and the uncertainty in Macau, I will project an additional $800 million in EBITDA ($850 million total) for Las Vegas Sands because of this new resort. That brings the company's EV/EBITDA ratio to 8.89.

The biggest difference between these three companies is their growth prospects. Wynn is building a new resort on Cotai, which will be the company's third major resort. Las Vegas Sands has Lot 3 in Macau, the company's seventh major resort, and Melco Crown is finalizing a stake in a property in the Philippines and owns a 60% stake in Cotai's Studio City. The Philippine casino is the closest to completion but probably won't have the same impact as the other two.

Final call
With all of this in mind, I think the low valuation of Melco Crown and potential upside of developments makes it the best buy in gaming for the next year. Wynn comes in a close second with its conservative management and large development on Cotai, but the project is too far out for the stock to overtake Melco.

As far as Las Vegas Sands is concerned, the company's value isn't as strong as Wynn or Melco right now. I'm also worried that Sands Cotai Central is taking business away from The Venetian, which we clearly saw in the second quarter. In fact, the new resort seemed to help its neighbor City of Dreams, which is owned by Melco Crown. Similar to Wynn, Lot 3 is too far from completion to bump the stock up another notch, and in Las Vegas Sands' case. the impact of one more casino will be smaller to the company than an additional casino is for Wynn or Melco Crown.

Right now, the best stock in gaming is Melco Crown, a stock that you may be surprised to hear has outperformed rivals over the past one, two, four, and five years (the Year Three win goes to LVS).

For a more detailed look at one of the best stock in gaming, Las Vegas Sands, check out our brand-new premium report on the stock. It covers the company's opportunity and risks and highlights the greatest competitive advantage the company has. Find out more about the report.

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. We Fools don't 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. The Motley Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (6)

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  • Report this Comment On August 30, 2012, at 10:24 AM, cp757 wrote:

    George Carlin points out that we call the mainstream a stream because it is far too shallow to be a river and the mainstream does not understand Macau. ‘There are three things that matter in the gambling industry: location, location, location.’

    One principle reason nearly all analysts are so far off is they do not understand the word capacity planning. Macau has no room for anyone to stay.

    Adelson is building as fast as he can. Nothing like this has happened in history. In all of Macau they have 21,695 rooms for 37 to 40 million people to stay at now. The government would open the gates but the people have no place to stay.

    Las Vegas Sands had 7,638 rooms and added 1,860 rooms on April 11, 2012. Now on September 20th they will add 1,829 more rooms, and 2,067 more rooms progressively opening beginning Oct. 2012. The next project is 4000 on lot 3 and 10,000+ hotel rooms to be developed on Hengqin Inland.

    In Vegas you have the same number of visitors as Macau and they have 135,000 rooms. Do you see the problem. Adelson is the only game in town. He will have over 24,000 rooms when others are going to open 1,000 to 2,000 rooms.

    Las Vegas Sands will have 40% of the rooms with a table capacity of 1,535 mass tables or 27% of mass tables and 6,000+ slot machines and ETGs and thats 31+% of slot machines in all of Macau over the next 6 month's. They have the highest EBITDA market share and they will make the other casinos look like 7/11 buildings.

    Las Vegas Sands is the only company that will have the growth because of Macau. The Venetian Macau is the biggest "Inhabited Building in The World".

    They serve 80 to 100 thousand meals a day. The banquet room has banquets for 10 thousand people at a time, often.

    The inside of The Venetian Macau has 50 million dollars of gold leaf on the ceiling. Never in history has anything like this been accomplished. Never. In terms of size,number of people living and working at the location, the amount of money made per day or any measure of success, nothing comes close.

  • Report this Comment On August 30, 2012, at 10:43 AM, 52greenpond wrote:

    Agree with your comments, but think of all the millions with mobiles. What do you think of Zynga?

    If the legalities go through... big if... then gambling on one's mobile?

  • Report this Comment On August 30, 2012, at 10:48 AM, cp757 wrote:

    I wonder what Travis would say if WYNN or MPEL was opening a new casino on the Cotai Strip over the next 8 months that had 6,863 rooms.

    Do you think he would say they would be the best company ? Would he see more value ? Would he tell you to buy ?

    Opening The New Venetian Macau and The Sheraton Macao Hotel, on the Cotai Strip, Macau

    “We have 6,863 guest rooms and suites. Including The Venetian Macau, Sheraton Club Rooms and Family Suites, that feature views of the famous Cotai Strip, signature Sheraton Sweet Sleeper™ beds, flat screen TVs, thoughtful extras and more.”

    Las Vegas Sands is doing that. SURPRISE

    The Marina Bay Sands is like Singapore's Statue of Liberty in the harbor. They are on pace to do 3.087 billion in total revenue for all of 2012.

    Las Vegas Sands is on pace for 1.424 billion dollars in revenue just on the revenue they have at The Venetian Resort Hotel Casino, The Palazzo Resort Hotel Casino, and The Sands Expo and Convention Center in Las Vegas, Nevada

  • Report this Comment On August 30, 2012, at 11:26 AM, cp757 wrote:

    At some point in time WYNN and MPEL will show the money it takes to expand and that will change the figures that Travis is showing.

    Las Vegas Sands has been building at a fevers pace for the last 10 years. Unlike MGM it has been in the right location. MGM's money goes to building maintanance and interest payments at a high rate. WYNN and MPEL will do the same as they expand.

    Because Las Vegas Sands built in the right location ( i.e. the Cotai Strip which they own and Singapore which they own) they made money to pay off almost 20 billion dollars worth of property. As Travis points out Las Vegas Sands only has $5.8 billion in Net Debt.

    Las Vegas Sands is still the best Integrated Resort corporation in the world. JMHO

  • Report this Comment On August 30, 2012, at 11:55 AM, cp757 wrote:

    This is the second quarter results of the company's mentioned in the article.

    Las Vegas Sands had 845 million in adjusted property EBITDA in the second quarter

    Caesars........................512 million in adjusted property EBITDA in the second quarter

    MGM.............................501 million in adjusted property EBITDA in the second quarter

    WYNN...........................384 million in adjusted property EBITDA in the second quarter

    MPEL............................219 million in adjusted property EBITDA in the second quarter

    MGM and CZR have 30.9 Billion dollars in Net debt. Not a good investment.

    Las Vegas Sands had 845 million in adjusted property EBITDA in the second quarter

    WYNN...........................384 million in adjusted property EBITDA in the second quarter

    MPEL............................219 million in adjusted property EBITDA in the second quarter

  • Report this Comment On August 30, 2012, at 1:14 PM, cp757 wrote:

    Sands China president and chief executive Edward Tracy calls it "affordable luxury. There's nothing like it in this market."

    Until now, nearly all of Macau's new hotels have been in the five-star category with prices to match.

    "If you build to a certain scale, you can make it affordable," Tracy adds. "We recognize that not everyone comes here for Gucci; some come here because we have Levis."

    Sand Cotai Central is a key piece of making Macau, specifically Cotai, a major center for MICE, the lucrative meetings, incentives, convention and exhibition business that brings business travelers spending company money to destinations for multi-day stays.

    Adding Sands Cotai Central to Venetian Macao and Four Seasons Macao will give Sands China nearly 8,000 hotel rooms, 9,000 conference rooms, and 600 retail and dining outlets, linked by an overpass across what LVS trademarked as the Cotai Strip. "This is the largest tourism project in the world, an unprecedented, fully integrated resort city at the center point of Cotai and the best of Macau," Tracy said.

    "There isn't a convention in the world that needs this much space," Adelson said. "We have built a multiplicity of amenities unlike anyplace in the world."

  • Report this Comment On August 30, 2012, at 10:50 PM, JF125780 wrote:

    cp757 covers everything that needs to be said.

    All I have to add is when you have Adelson, one of the 10 richest men in the world owning over 50% of LVS and together with the insiders owns 72% of the company.

    Plus when the Republican convention ends tonight and everyone comes back from vacation I expect to see a jump in LVS's price.

    I'm buying more LVS.

    Danny

  • Report this Comment On September 03, 2012, at 2:25 PM, cp757 wrote:

    The August numbers for Macau are out. LVS is going higher.

    Las Vegas Sands is at the right place at the right time and Macau is on pace for 37.445 billion dollars. In 2011 revenue for Macau was $33.5 billion dollars. Macau did 3.3 billion dollars in August and this increase in revenue is due to mass market gambling.

    Las Vegas Sands has the highest percentage in mass market. The most rooms, gaming tables, and slots. The revenue in Macau will be 4 billion dollars higher in 2012 than it was in 2011 and will go even higher in 2013.

    The Hotel Rooms in Macau that Las Vegas Sands will open over the next few months is 9,324 4/5‐star hotel rooms. That's 39% of all the 4/5‐star hotel inventory and the other operators average just 12.2% each.

    In Macau the reason Las Vegas Sands is going to dominate the market is because they have a total Table Capacity of 1,535 mass tables and that's 27% of all the mass tables

    The 5 other operators in Macau do not have the 135-player Imperial Stadium Baccarat Multi-Tabling games like The Venetian Macau and it's 100-player younger cousin at the Sands Macau.

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