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Gaming Stocks Are Too Hot to Handle

Over the past six months, gaming stocks have had an incredible run. Melco Crown (NASDAQ: MPEL  ) has more than doubled while Wynn Resorts (NASDAQ: WYNN  ) , Las Vegas Sands (NYSE: LVS  ) , and MGM Resorts (NYSE: MGM  ) are all up around 50%.

LVS Total Return Price Chart

LVS Total Return Price data by YCharts.

But these huge gains come at a time when gaming growth both in the U.S. and in Macau is growing far slower than the stock prices are growing. So, are gaming stocks too hot to handle?

Value matters
It's relatively easy to look at a gaming company's value by looking at past results, because expansion has slowed from a torrid pace over the last decade. The best way to value gaming companies is by taking the company's enterprise value (market cap plus debt, minus cash) and dividing it by EBITDA, which is an approximation of cash flow. This strips out depreciation and interest payments, which aren't operating expenses and are a factor of money spent and capital structure, respectively.

Below I have laid out the enterprise value/EBITDA of each of the five biggest U.S.-traded gaming companies by revenue and the numbers that go into the ratio.


Market Cap

Net Debt



Las Vegas Sands

$43.3 billion

$8.0 billion

$4.6 billion


Wynn Resorts

$12.4 billion

$3.9 billion

$1.6 billion


Melco Crown

$11.2 billion

$996 million

$904.3 million


MGM Resorts

$6.4 billion

$11.6 billion

$1.7 billion


Caesars Entertainment

$1.0 Billibillionn

$18.8 billion

$2.0 billion


Source: Yahoo! Finance and company filings. TTM = trailing 12 months.

What you'll see is that every stock besides Caesars Entertainment (NASDAQ: CZR  ) has a ratio above 10. But I'll throw out Caesars as a buying option because the company has 18.8 times the debt as it does market equity, and it operates in worse markets than every other company. This makes it an extremely high-risk investment. MGM is in a similar situation and unless you are looking for leveraged growth in Las Vegas, this is a high-risk stock as well. 

Melco Crown has the highest ratio above, but the stock has run so far, so fast that I think it's gotten well ahead of itself. Macau gaming revenue grew at just 13.5% last year, down from 57.8% in 2010 and 42.2% in 2011, so the company's organic casino growth will slow. As gaming investors, we need to know when we're buying value and when stocks are overpriced. In 2011, when Melco Crown traded at an 8.19 EV/EBITDA multiple and Macau was growing more quickly, I thought it was the best stock in gaming. Now, it's simply too expensive to touch.

Las Vegas Sands and Wynn Resorts are in similar territory, although I'm not panic-selling at the current valuations; I just wouldn't be a buyer here. 

Growth and multiple analysis
Half the battle with gaming stocks is buying at an attractive valuation. In general, I don't like to buy gaming stocks with an EV/EBITDA ratio more than 9 unless there are major growth avenues in the near future. Patient investors can wait for these opportunities and pounce, avoiding overpaying for gaming stocks.

The link above shows that Melco Crown traded at a multiple well below 9 just over a year ago. Wynn Resorts was at 9.6 at the same time and Las Vegas Sands was 11.5 just before opening a huge new casino in Macau. Growth and more attractive multiples made that a great time to buy gaming stocks. 

Today, Las Vegas Sands and Wynn are both years away from opening their next resorts in Macau and Melco Crown only has part ownership of a Philippines property and another resort on Cotai (currently without table games). This distant growth doesn't merit paying a premium for any of these stocks right now, especially considering the slowing growth in Macau. 

A deeper look at Melco Crown
Melco Crown is often a forgotten company in gaming, but it has tremendous upside from Studio City and its partnership in the Philippines, which could more than double the company's revenue base. This being a more speculative investment, is it worth the risk for smaller investors? The Motley Fool answers this question and more in our most in-depth Melco Crown 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 (11) | 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 January 28, 2013, at 2:13 PM, cp757 wrote:

    Travis you forgot to tell everyone that MPEL wont get any new tables in 2013 and WYNN wont get any new tables and MGM wont get any new tables . They also wont get anymore rooms or in 2013 or 2014 or 2015.

    Las Vegas Sands just got 200 new tables on the Cotai Strip. CLSA analysts Aaron Fischer and Richard Huang said the additional tables could translate into an extra $511 million in net revenue per year for Sands assuming the real estate is allocated to mass market customers. Sands will now have 1550 tables, or 15% more than the 1350 they had before, they added.

    LVS has 27% of the tables in Macau and 40% of the rooms. They will have that advantage in 2013 , 2014,2015, and 2016.

    Sand’s Cotai Central has completed its second tower (+2,067 rooms), which pending final Government approval may open ahead of Chinese New Year, or February 10 this year. The addition leaves LVS with close to 40% of the hotel capacity in Macau. Then in 2016, they open the Parisian on Lot 3 with 4000 more rooms.

    Its the money that you have to report on. All the other operators are screaming for more tables and Macau just gave all of them to Las Vegas Sands. I think the Macau government likes Sheldon Adelson because he had the vision to build the Cotai Strip , the biggest gambling hub in the world.

  • Report this Comment On January 28, 2013, at 2:48 PM, spokanimal wrote:

    Regarding your quote...

    " I don't like to buy gaming stocks with an EV/EBITDA ratio more than 9 unless there are major growth avenues in the near future"

    ... I am aware of one gaming company in particular that is completing large expansions in an industry environment that has been expanding significantly beyond expectations for the past few months.

    Travis, can you cite the more than half-dozen "growth avenues" that pertain to that company?

    Do you know which company I'm aluding to?


  • Report this Comment On January 28, 2013, at 2:54 PM, 10HighSigns wrote:

    Travis has been wrong for the last year...isn't this the guy with a Mechanical Eng'g Degree? He's been in the wrong job and Motley doesn't have the guts to send him where he belongs!

  • Report this Comment On January 28, 2013, at 3:07 PM, cp757 wrote:

    10high Travis has an agenda . These are the stocks he owns :SPWR, Long Jan 2015 $7 calls on SPWR, Long Jan 2015 $5 calls on SPWR, AMZN (Short), Managed account, AAPL, BRK-B, INTC, KMI, MSFT, SDRL, SPWR, WYNN, VOD, AAPL.

    He missed LVS and now he just pumps WYNN

  • Report this Comment On January 28, 2013, at 3:44 PM, 10HighSigns wrote:

    Well, we missed LVS around $1.96, but got it in the $9.00 range...then played it up to $55. MPEL,

    we got in the ninish and I wanted to sell if it got to

    $10 (but didn't). So we played with that most of the way up...WYNN doesn't seem like a WIN...INTC, AAPL, MSFT ..ho-hum for Travis, guess the guy just doesn't like making money.

  • Report this Comment On January 28, 2013, at 4:15 PM, mbablitz wrote:


    You are disregarding the size of Macau's gaming market when you summarily dismiss the percentage gain in growth for Macau. As you know Macau is the hottest gaming market in the world. Its Gross Gaming Revenue (GGR) was $38 billion last year. Compare that to the second biggest market, the Las Vegas Strip which generates approximately $6 billion in gaming revenue. Would you rather have a 13% gain on $38 billion or 40% on $6 billion?

    Most analysts predicted low single digit GGR growth in Macau for 2012. Most analysts also predicted a hard landing for China's economy too. Neither came true. This year there are even more catalysts to keep Macau's GGR growing in the double digit range.

    There are 200 more tables; thousands more hotel rooms; improved tourist transportation infrastructure with more trains that come from farther away, longer border gate hours, and more border gates. There is a bridge being built from Hong Kong and there are fewer visa restrictions. China's GDP is also expected to grow by 8% for the next several years.

    Oh, I forgot about that 50% number... In LVS' case, it also has 50% of the Singapore gaming market which is the third largest in the world at just under $6 billion.

  • Report this Comment On January 29, 2013, at 2:14 AM, BenKeel wrote:

    As a money manager, I can assure everyone here.

    Motley doesn't have a clue about trading or investing.

  • Report this Comment On January 29, 2013, at 9:14 AM, hodgepdg wrote:

    The reason to like some of these stocks is the potential for online gaming especially poker. There is a huge upside and it is close to becoming a reality.

  • Report this Comment On January 29, 2013, at 9:29 AM, cp757 wrote:

    hodgepdg Shares of Nevada-based IGT have lost 13 percent of their value since the acquisition of on line gaming technology.

    Jan 29 (Reuters) - U.S. slot machine maker International Game Technology should consider strategic alternatives for the social gaming unit it bought for $500 million a year ago and focus instead on growing Asian markets, an investor in the company said.

    Jason Ader, whose investment firm is leading a group seeking representation on the board of IGT, said he believed the company had lost its focus by venturing into online gaming.

    "IGT needs to get back to basics in developing games for its casino customers in the U.S. and Asia,"

  • Report this Comment On January 29, 2013, at 10:59 AM, 10HighSigns wrote:

    There is ONE POSITIVE in Travis' favor....the gaming revenue figures for Macau (due out on

    or about Feb 1st) will not be very good for January. Hence, we are seeing a pull back in all

    the Macau casino stocks as they prepare for the

    News Release.

  • Report this Comment On January 30, 2013, at 6:01 PM, 10HighSigns wrote:

    Lewt's hope that sooner or later somebody visiting

    VA. approaches Travis after work on his way home. He can hurt peoples income and must

    learn to eliminate his B.S.

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