This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Time the market, or...?
In investing, some people say that "timing is everything." Problem is, time is rarely a singular event.

Take yesterday, for example, when the investment bankers at Craig-Hallum initiated coverage on major Macau casino players Las Vegas Sands (NYSE: LVS  ) , Wynn Resorts (NASDAQ: WYNN  ) , and MGM Resorts (NYSE: MGM  ) , and told investors to buy two of 'em (Sands and Wynn), while having positive things to say about MGM as well). In all likelihood, C-H thought itself quite clever, slipping in its endorsements right after Reuters reported that gaming revenues in the Chinese gambling enclave had hit consensus targets, risen 8% year over year, and were on track to reach $38 billion in toto, a number six times bigger than the annual take in U.S. gaming capital Las Vegas.

They would have been right... except for the fact that no sooner had C-H published its endorsements than another report was released Tuesday. This one announced that Chinese regulators are threatening to crack down on Macau junket operators who finance gambling expeditions to the enclave by loaning money to the gamblers, potentially denting the growth rate in gambling going forward.

Oops.

Within hours of that latter report being released, shares of MGM were down 2.5%, Sands was down 2.8%, and Wynn had lost 2.9%. Melco Crown Entertainment (NASDAQ: MPEL  ) , a stock that's made even bigger bets on Macau, relative to its operations elsewhere, dropped a staggering 7%. In each case, the "Chinese crackdown" news obviated the "good gaming revenues" news, and wiped out all the gains (and more) racked up in the previous day.

...time in the market?
Clearly, picking the right time to dive into Chinese gaming stocks is no easy matter. There's no telling, for example, whether the next press release out of Macau will be one describing better revenue growth in December, or worse, new Chinese regulations on gambling junkets, or confirmation that the regulatory threat was really just a regulatory bluff.

But if an investor can't invest based on the headlines, though, what can he do with these stocks?

The answer, appropriately enough, is to "hedge your bets." If you want a piece of the action in Macau, at least do yourself a favor and buy only the best bargains, so that if future news is bad, you've less money to lose, and if future news is good... you've got more room to the upside. And how do you know which bargain is best?

The numbers tell the tale:

 Company

P/E Ratio

Price-to-Free Cash Flow

Projected Growth Rate

Las Vegas Sands

26.6

26.3 

12.6%

MGM

negative

7.6 

6.7%

Melco Crown

19.1

negative 

36.9%

Wynn

21.0

10.1 

10.2%


So what can we glean from these numbers at the major Macau operators? Well, right off the bat I think we can agree that Las Vegas Sands is a loser. Whether valued on GAAP earnings or real cash profits, the stock's mid-20s ratios mean it's simply overpriced relative to the low-teens growth rate that Wall Street expects it to achieve over the next five years.

MGM, in contrast, looks interesting. Unprofitable from a GAAP perspective, it's unlikely to draw much attention from investors who focus on P/E to the exclusion of all else. Meanwhile, the company's prodigious free cash flows make it an interesting bet, despite industry-low growth expectations. In the end, though, high debt levels (MGM bears more than $11 billion in debt, net of cash) make this bet, too, too risky to take.

Melco Crown offers an interesting play for the non-risk-averse. On one hand, it boasts the fastest expected growth rate of any casino operator out there -- more than twice its reported P/E. On the other hand, Melco has never been particularly diligent about updating investors on its cash position. Current free cash flow data is hard to come by, so if you want to invest in this one, you pretty much have to take it on faith that Melco's GAAP bookkeeping tells the whole story. (Hint: I'm not much for taking companies on faith. Trust but verify, you know?)

Foolish takeaway
When you get right down to it, therefore, I think the best bet in betting on Macau today remains Wynn Resorts. It's got the second-lowest P/E ratio on offer, and the second-lowest price-to-free cash flow ratio to boot. Debt levels at Wynn are moderate -- about $3.2 billion net of cash on hand. And the unassuming 10% growth rate is nonetheless right in line with the firm's price-to-free cash flow ratio.

Toss in a modest 1.8% dividend yield, and I think investors just might have found a winner in Wynn.

Macau is bigger than the Las Vegas Strip, with $33.6 billion of gaming revenue in 2011, and more on the way in 2012. And Wynn Resorts is perfectly positioned to capture the opportunity in the region. Is that reason enough for investors like yourself to consider investing in Wynn right now? The Motley Fool answers this question and more in our most in-depth Wynn Resorts research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.


Read/Post Comments (4) | Recommend This Article (1)

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 December 05, 2012, at 9:16 PM, JF125780 wrote:

    i'm sorry Rich, but I can't recommend your article as this is the worse advice you can give your readers.

    Why didn't Motley Fool stop this story from hitting the press as your article sets Motley Fool back a little from their usual high standards.

    LVS has set record profits every quarter as well as Wynn plus LVS is growing and the future is very bright for them.

    Danny Kowkabany

  • Report this Comment On December 05, 2012, at 9:27 PM, BenKeel wrote:

    Motley Fool will tell you to sell LVS when it's down and to buy MGM when it's up. Goin' with the wind.

    Remember folks, this whole newsletter is run by a bunch of kids fresh outta' college with no street or investment experience.

    May explain why they had US Steel at a buy at $40.00 last year.

    LOL

  • Report this Comment On December 05, 2012, at 9:29 PM, BenKeel wrote:

    BTW: How does this article make it in "This Just In: Upgrades and Downgrades"????

    This is the dumbest website I've ever encountered.

  • Report this Comment On December 05, 2012, at 9:51 PM, cp757 wrote:

    This author is not very informed about Macau and the way it works. Las Vegas Sands controls mass market gambling in Macau with the most number of rooms and the most tables. 55% of all profit in all of Macau comes from Mass Gaming. Thats 55% of the PROFIT.That is why the competition will not catch up in Macau.

    LasVegasSands is expanding it's market-leading asset base in Macao, the world’s largest and most profitable gaming market.

    They are delivering strong growth in every segment in Macao, and have meaningful additional growth opportunities across the Macao portfolio

    It's track record includes, strong cash flow and balance sheet, and leadership team position to: Execute our strategy to deliver strong organic growth in our current markets and make additional investments to enhance growth in those markets

    1.Increase the return of capital to shareholders

    .through a recurring quarterly dividend Increased dividend by 40% to $0.35 per quarter, or $1.40 per year, for 2013 Plus a 2.75 special dividend in December 2012

    1.Pursue promising development opportunities

    around the world

    Mass Table, Slot and ETG Win Per Day in Macau is up 39.4% as of the 3Quarter

    Macao Operations Rolling Volume Increased by 45.5%

    The Parisian Macao

    Targeted completion date: First quarter 2016

    Hotel rooms and suites: 3,000+

    Gaming capacity: ~450 table games and 2,500 slots and ETGs

    Additional amenities including retail mall, replica Eiffel Tower, MICE space, diverse food & beverage options and entertainment

    First Quarter 2013 Las Vegas Sands adds 200 gaming tables

    Walkover Bridge to be completed in 1Q13

    Phase IIB will open in 1Q13 and feature ~2,100 Sheraton-branded hotel rooms

    The author should read up on Las Vegas Sands it's a great investment.

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