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The year 2012 was a marginal one for gaming stocks as a whole. Las Vegas Sands (NYSE: LVS ) , Wynn Resorts (NASDAQ: WYNN ) , and MGM Resorts (NYSE: MGM ) have all underperformed the S&P 500 with a few days left in trading, although they're all trading higher for the year. Caesars Entertainment (NASDAQ: CZR ) has been a complete dud, but I can't say I didn't expect that.
So what happened in 2012, and why was Melco Crown the hottest stock in gaming?
Macau's growth continues
Since Melco Crown only operates in Macau, the company's results were driven by continued growth there. Gaming growth has slowed from 57.8% in 2010 and 42.2% in 2011 to just 13% through November, but some growth is better than none. One of the reasons Melco Crown outperformed its rivals is its performance as new neighbors emerged.
Las Vegas Sands began opening Sands Cotai Central next to Melco's City of Dreams during the second quarter, and there were questions about whether it would add to Melco's revenue or detract from it. So far, City of Dreams has held its own, growing EBITDA consistently even as new neighbors are added. A critical mass is building on Cotai, and the trend this year was growth on Cotai at the expense of the Macau Peninsula, where MGM and Wynn are located.
So why didn't Las Vegas Sands outperform with its major exposure to Cotai? Part of the reason was Singapore (which I'll get to in a minute), but the other part was Melco Crown's poor operational performance prior to 2012. As far back as 2010, I've singled out Melco Crown as one of the worst operators in Macau, getting fewer dollars of revenue to flow to the bottom line than the competition. But it has slowly made progress in this regard, and EBITDA margins rose to 22.4% in the third quarter, far above the 9% it posted in 2008. The company still isn't as efficient as either Wynn Resorts or Las Vegas Sands in Macau, but a point increase in EBITDA margin will flow to the bottom line just as well as an added point of growth, and it's easier to generate.
Growth avenues emerge
Melco Crown also moved forward with growth plans in 2012. It signed a deal that gives it part ownership in a nearly completed casino in the Philippines and Studio City in Macau got funding to move forward. Since Melco Crown is a much smaller company than Las Vegas Sands or MGM Resorts, the addition of a single new casino has greater impact on revenue and EBITDA growth than these companies adding a resort, so investors cheered the moves.
Singapore drags on Las Vegas Sands
Las Vegas Sands could have been the year's best stock because it continues to dominate Macau as the largest developer on the all-important Cotai Strip, but Singapore was actually a drag on the company this year. After an explosive opening and an initial year of success, it looks like the bubble popped on revenue and bottom-line results in the highly controlled region.
The chart below shows how Las Vegas Sands' EBITDA continued to grow in most of its markets in 2012, but Singapore fell off the map. In the third quarter, the company generated just $260.8 million in EBITDA, well below the peak of $472.5 million in the first quarter.
This isn't a long-term disaster for the company, but this year investors reset their expectations for Singapore. Better hold results will bring results to a more normalized level in the future, but we may need to set expectations for Marina Bay Sands at $1.2 billion to $1.5 billion in EBITDA annually going forward rather than shooting for the more than $2 billion that once seemed possible.
Why Melco Crown crushed 2012
The factors that led to Melco Crown's great year -- improving margins, new casino agreements, and a low valuation to start the year -- won't drive the stock in 2013, so investors should set realistic expectations for next year. I'll pick my top gaming stock for 2013 early next week, so check back for my analysis of the industry.