The Best Stock in Gaming

I'm back again on a search for the best casino stock in the gaming industry. A lot has changed in the industry over the past year with explosive growth on Cotai in Macau, continued deterioration of regional gaming in the U.S., and a new construction boom that will drive the next generation of growth in the industry.

Over the past year, gaming stocks have had an incredible run, as you can see below. My top pick from a year ago, which is Melco Crown (NASDAQ: MPEL  ) , performed the best over the past year, driven by growth on Cotai.

LVS Total Return Price Chart

LVS Total Return Price data by YCharts

Melco Crown has definitely been a great performer financially, but a lot of the gains seen on the market are because of valuation multiple expansion. I'll explain later why that will keep this from being my top stock this time around.

Multiples matter
I'll be using an enterprise value/EBITDA multiple to put a value on these stocks. The enterprise value allows me to pull debt into the equation, and EBITDA is a great approximation of the cash flow casinos spit off from operations. Below, I've built a table with the net debt, market cap, and trailing 12-month EBITDA for each company.

 

Market Cap

Net Debt

EBITDA (ttm)

EV/EBITDA

Las Vegas Sands

$46.5 billion

$7.0 billion

$4.16 billion

12.9

Wynn Resorts

$13.9 billion

$3.5 billion

$1.68 billion

10.4

Melco Crown

$14.6 billion

-$300 million

$1.08 billion

13.3

MGM Resorts

$8.4 billion

$12.0 billion

$2.06 billion

9.9

Caesars Entertainment

$2.3 billion

$19.3 billion

$1.89 billion

11.4

Source: Yahoo! Finance and company earnings releases.

Based strictly on the data above it looks like MGM Resorts is the least expensive and Melco Crown is most expensive. But we have to consider location, growth rates, and future expansion to paint the true picture of the industry.

The U.S., Macau, and Singapore
Melco Crown, Las Vegas Sands (NYSE: LVS  ) , and Wynn Resorts (NASDAQ: WYNN  ) all get a majority of their revenue from Macau, an area that's still growing double digits per year. On the flip side, Caesars Entertainment (NASDAQ: CZR  ) gets most of its revenue from regional gaming in the U.S., and the balance in Las Vegas. Regional gaming has struggled with increased competition, and nearly everyone is seeing falling revenue and profits.

Everyone on this list except for Melco Crown has some exposure to Las Vegas, where conditions have slowly and steadily improved since the recession hit bottom. That's where MGM Resorts (NYSE: MGM  ) gets most of its revenue, with a 51% stake in its Macau subsidiary sprinkled in.

With these positions in mind, Macau exposure should be worth the most with Las Vegas second, and little value placed on U.S. regional gaming, where companies are losing money. That's the framework of the lense I view companies through. Now let's look at expansion.

Expansion in Asia
Every one of these companies has a resort coming on Cotai, except for Caesars. Add to that a stake Melco Crown has in a Philippines resort, and there's a fair amount of expansion coming to the industry. Most of the expansion on Macau won't take place until 2016, but it's still worth looking at when considering upside.

Let's assume that each new Cotai resort generates $1 billion in EBITDA (probably low given existing resorts), and then adjust the valuation multiples. I've accounted for MGM's 51% stake in its Macau subsidiary, and projected a total of $1 billion in new EBITDA for Melco Crown from its 60% ownership in Studio City and minority stake in The Philippines. I haven't adjusted for the majority stake Las Vegas Sands and Wynn have in Macau because I didn't above.

 

Projected EBITDA

Projected EV/EBITDA

Las Vegas Sands

$5.2 billion

10.4

Wynn Resorts

$2.7 billion

6.5

Melco Crown

$2.1 billion

6.9

MGM Resorts

$2.6 billion

7.9

You can see that a single casino added to Melco Crown and Wynn makes a huge impact on valuation because they only have two major casinos, so adding one more changes their respective values a lot. Adding one more to Las Vegas Sands doesn't have the same impact.

The top stock in gaming
When you consider the weakness in U.S. regional gaming, it's easy to write off Caesars Entertainment immediately. Beyond that, Macau is growing faster than Las Vegas, and Cotai is growing faster than the Macau Peninsula. That weights my opinion heavily to Cotai and the current and future operators there.

I'd give an edge to Melco Crown over Las Vegas Sands because it is adding to a smaller casino base, but that's where the debate becomes a toss-up. MGM's results are leveraged by debt, which could help the stock outperform, Melco Crown has expansions with a lot of unknowns, and Wynn's Cotai resort makes it look inexpensive long term.

This quarter, I'll split my picks into two categories based on risk. The low-risk pick based on the values above is Wynn Resorts. The company has a good balance sheet and pays a $1 quarterly dividend along with a regular special dividend, making this a good option for those looking for income. The riskier pick goes to Melco Crown, which has a great balance sheet and will continue to generate strong returns from City of Dreams on Cotai. We don't know how big The Philippines market will be, and if or when Studio City on Cotai will get table games, which adds risk to the stock.

If all of the dominoes fall correctly, Melco Crown could continue its incredible run. But for those looking for a little safer pick, Wynn Resorts is at the top of the list.

Picks for a growing Asian economy
China's economic growth is driving Macau, but there are other parts of Asia and the world that will drive the recovery in the future. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!


Read/Post Comments (9) | Recommend This Article (15)

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 August 17, 2013, at 11:16 AM, spokanimal wrote:

    Travis, you did a much better job with this portrayal than you have with past writings. By taking a SOTP approach to your evaluation, you've approached it in much the way securities analysts would, and adding in a present value component of future EBITDA streams caps that off in a way that's superior to what I've seen from your writings in the past.

    I presume from the length of all of the motley fool pieces that I've read that you're limited in terms of the length of your articles... a limitation that appears to be absent in other media, such as Seeking Alpha, where articles can take up to 5 or 6 times as long to read. Therefore, I can't fault you for leaving a few refining aspects of your analysis out.

    What I would add in are more detailed assumptions of project completion dates (earlier for Parisian... later for Wynn Cotai... even a bit later for MGM coati) or labor issues that appear tied to project slippage. There's also room for footnotes, such as the small possibility that Studio City won't be permitted for gaming.

    More apparent is the lack of recognition of a prolonged ramp on the part of Venetian/plaza/Cotai Central critical mass, which present empirical evidence is suggesting will continue for awhile and cause you to under-shoot with your sands EBITDA projection. The 34% yoy flip-flops on the ground increase for july for that concessionaire should have been absorbed before missing that crucial input to the table above.

    To further the "prolonged ramp" argument, present capacity utilization inputs should also have been considered, as Sands suffers from the lowest table productivity and highest under-utilized capacity in the industry... in the hottest geographic locations... and thus has the most to gain from the significant efforts that it's making right now to continue it's 34% yoy patronization growth into the remaining months of this year and, in all likelihood, a quarter or 2 into 2014 as well. Robin Farley did a good job of integrating such assumptions... as did a former student of mine over at JPM.

    Thanks again for your piece, Travis. It was a good read... and congrats on your good MPEL call.

    Spokanimal

    Spok

  • Report this Comment On August 17, 2013, at 12:51 PM, 10HighSigns wrote:

    Melco Crown was a no brainer for almost everybody except Travis. He was negative on this stock when it was 14,negative at 15, 16, 17, 18 and 19. Finally, near 20, along comes Travis with his belated call. Duh....hmmm. Way to go, Travis, you can pick 'em when they get expensive and after the big gains were missed!

  • Report this Comment On August 19, 2013, at 10:33 AM, JF125780 wrote:

    I agree with spokanimal and I want to add a crucial point that Melco does not pay a dividend plus brokerage firms like e.option charge a yearly fee to own Melco.

    Now take LVS and Wynn which do pay a nice dividend and, Wynn also paid a special dividend for several years plus LVS paid a special dividend last year and both will probably continue to pay another special dividend this year.

    Thank you but I'll stay with LVS and Wynn.

    Danny Kowkabany

  • Report this Comment On August 19, 2013, at 1:43 PM, spokanimal wrote:

    A channel check from Sterne Agee's David Bain provides the following addendum to my comment above in terms of the results of the business ramp at Sand's Cotai Central development:

    August table only gross gaming revenue (“GGR”) is MOP17.6b through August 18.

    Including slots, the GGR run-rate for August is MOP31.5b or +20% YoY, *** on track to slightly exceed the all-time monthly GGR record set in March of this year (MOP31.3b).

    *** We raise our YoY August GGR forecast to +17% to +20% from +16%. Last week’s daily MOP increase comes despite high typhoon signals on the Island.

    Market Share. According to our checks, table-only market share August 1 through August 18 was:

    LVS at 23.1% (vs 22.8%%), Growing steadily now

    MPEL at 14.2% (vs 13.2%), nice gain

    WYNN at 10.3% (vs 10.2%), still struggling

    SJM at 22.9% (vs slot inclusive July share of 24.6%), big decrease

    Galaxy at 17.5% (vs 19.7%), lost share and

    MGM at 12.0% (vs 9.5%). huge gain? suprisingy up big?

    S.

  • Report this Comment On August 19, 2013, at 1:46 PM, spokanimal wrote:

    It should be noted that GGR market share data is not hold-adjusted, and can thus jump around from month to month depending on how lucky a given gaming concessionaire plays.

    For that reason, I recommend using a multi-month, moving average to smooth and normalize the impact of hold.

    Spok

  • Report this Comment On August 19, 2013, at 5:49 PM, Mega wrote:

    Nah, I think the best gaming stock is Tropicana (TPCA). EV/EBITDA of 4.5x and 0.8x tangible book value.

    Once Icahn remembers that he owns it and decides to flip it to a buyer, it will be a quick 2 or 3 bagger.

  • Report this Comment On August 23, 2013, at 1:59 PM, DrKickass wrote:

    On the fool.com homepage the image associated with this article is a picture of a shelf full of Xbox games.

  • Report this Comment On August 24, 2013, at 2:15 AM, stockmover wrote:

    Say what you will, but if you look at a 1 year chart lowly Caesars had a better return then all of the rest. Just goes to show that you can run numbers up the Wahzoo and and yet the final results can be substantially different.

    http://finance.yahoo.com/echarts?s=WYNN+Interactive#symbol=w...

  • Report this Comment On August 28, 2013, at 11:37 AM, ikkyu2 wrote:

    I'll put my two cents in and point out that MGM is slightly profitable right now with a gargantuan, low-interest debt load. It won't take much of a recovery - much of an uptick in margins - for their huge operations to see a giant increase in revenue and therefore in earnings attributable to common. That's what Travis calls leverage and that's why I happen to be most bullish on MGM.

    After all, it's a casino stock. Take the high odds.

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