Last week, I highlighted that 2012 was really a pretty mediocre year for the largest gaming stocks. Outside of a great year by Melco Crown (MLCO 0.33%), most companies underperformed the market as growth slowed internationally.
Regional players such as Ameristar Casinos (ASCA.DL), Pinnacle Entertainment (NYSE: PNK), and Penn National (PENN 2.36%) have jumped in the last month to have a decent 2012, but that's on acquisition news, not fundamentally strong earnings. EBITDA has improved marginally at Pinnacle and Ameristar, who are set to merge, and new properties have helped Penn over the past two years. But results haven't been all that impressive in 2012.
ASCA EBITDA TTM data by YCharts
So, as I search for the best gaming stock in 2012, all of these trends will play a role in who makes it out on top.
First-round cuts
There are a few companies that are easy to cut from the running of top gaming stock. Caesars Entertainment (CZR) has way too much debt to be considered and while a good year in the U.S. may cause this stock to outperform, it would only be because of immense leverage, which is reason enough to stay away.
I'm also not high enough on the regional U.S. market to recommend Penn, Pinnacle, or Ameristar if its acquisition falls through. Competition is increasing around the country and we're still a long way from a booming economy.
That leaves me with Melco Crown, Las Vegas Sands (LVS 2.42%), MGM Resorts (MGM 0.02%), and Wynn Resorts (WYNN 2.62%).
Location, location, location
These four companies have very different exposures to the world of gaming. Las Vegas Sands is the only one with exposure to Singapore and gets a lot of revenue from the Cotai Strip, while MGM is still Las Vegas-centric with a new project about to get under way on Cotai. Melco Crown is all Macau but 2013 will see expansion in the Philippines and Wynn Resorts will be the next to build a resort on Cotai.
Singapore will probably improve slightly from a disappointing 2012, but I'll put it on par with growth in Macau. The Chinese gambling enclave will probably see another year of high-single-digit or low-double-digit growth with a real possibility for downside with a crackdown on corruption in China. The U.S. looks to be stable this year with low-single-digit growth on the horizon. Add all of this up and I think it totally depends on what you're paying for a company that will determine the best stock in 2013.
The value play
When looking at the value of gaming stocks, I think the enterprise value/EBITDA method of valuation is most appropriate. This takes the market cap plus the net debt of a company and divides it by EBITDA, which is a proxy for cash flow in gaming.
When we do this, we can then compare growth opportunities and come up with the best stock in gaming. Below, I have a table with the relevant data and the EB/EBITDA ratio on the right. I've adjusted net debt at Wynn and Las Vegas Sands for dividends paid in the last month.
|
EBITDA (ttm) |
Market Cap |
Net Debt |
EV/EBITDA | |
|---|---|---|---|---|
|
Las Vegas Sands |
$2.75 Billion |
$36.7 Billion |
$8.01 Billion |
11.9 |
|
Wynn Resorts |
$1.58 Billion |
$10.95 Billion |
$3.86 Billion |
9.4 |
|
Melco Crown |
$904.3 Million |
$8.92 Billion |
$996.1 Million |
11.0 |
|
MGM Resorts |
$1.68 Billion |
$5.59 Billion |
$11.63 Billion |
10.3 |
Source: Company filings.
Based on these ratios, I will eliminate Melco Crown and MGM Resorts because I think Wynn clearly provides better value right now. Based on this ratio alone, it looks like Wynn Resorts is the cheapest and Las Vegas Sands is the most expensive. But Wynn gets most of its revenue and EBITDA from the Macau Peninsula and gaming is clearly moving toward Cotai. This is where Las Vegas Sands continues to open Sands Cotai Central and expand its share there.
If we estimate that Las Vegas Sands will generate around $800 million more in EBITDA from Sands Cotai Central and better hold in Singapore in 2013, this would bring the EV/EBITDA ratio down to 9.8, in the same ballpark as Wynn Resorts.
But here's where growth comes in and becomes the deciding factor in this battle. Both companies have a resort in early phases of construction on Cotai that will likely open in 2016. One resort added to Wynn's stable of two resorts will have a far larger impact than one added to Las Vegas Sands' six major resorts. This is the downside of being a $36.7 billion company; you need to add more casinos to grow.
Foolish bottom line
I think Wynn Resorts is the best stock in gaming for 2013, but it isn't far ahead of Las Vegas Sands. Better performance in Singapore and strong growth on Cotai could swing the year in Las Vegas Sands' favor. But I'm taking the cautious approach right now and favoring the consistent results of Wynn Resorts.
