Forget a Vegas Recovery, It's All About Macau

On Jan. 6, MGM Resorts International (NYSE: MGM  ) was upgraded to "buy" from "neutral" at Citigroup and given a $29 price target. The main thesis of the analyst report was that MGM Resorts can provide investors with exposure to the ongoing Las Vegas recovery.

US economy expansion
Economists continue to project an improving economy, which bodes well for domestic casino operators such as MGM. Economists at Fitch are projecting GDP growth of 2.4% in 2014 and 3.1% in 2015. This is important because there is a strong correlation between US GDP growth and the share price performance of MGM Resorts. When US real GDP growth bottomed out, MGM Resorts' share price significantly outperformed the S&P 500 index in the following year.

Year GDP Bottomed

MGM return in the following year

S&P 500 return in the following year

1995

52%

20%

2001

14%

23% Loss

2009

63%

13%

2011

12%

13%

MGM Resorts' Las Vegas hotel revenue has been improving consistently over the last three years due to a stronger visitation rate and a solid recovery in the convention business.

According to the Las Vegas Convention and Visitors Authority, Vegas is back, baby! The LVCVA has no official 2014 forecast, but the organization is optimistic that 2014 will follow the strength of 2012 and 2013.

In 2012 Las Vegas received 39.7 million visitors who came to enjoy the nightlife, attend a work convention, or just soak up the sun and place a bet or two at the tables or slot machines. 2013 is expected to top these numbers, with 2014 expected to continue the trend, according to Kevin Bagger, senior director of strategic research and analytics at LVCVA.

Macau is a gambling destination, not a tourist destination
David G. Shwartz, director of the Center for Gaming Research at the University of Nevada, said, "[T]he [Vegas] Strip is absolutely packed, downtown is packed. People are here. But they aren't spending as much as they used to." 

According to The New York Times, only 36% of the money collected on the Vegas strip is gambling-related. For anyone who has been living under a rock the past few years, Macau has clearly overtaken Las Vegas as the world's largest gambling hub.

Gaming revenue from the six casino operators in the Macau region rose 18.6% to $45.2 billion in 2013. By comparison, the Vegas Strip generated $5.8 billion from January to November (December data has yet to be officially released)

The Wall Street Journal described the Macau region as "a haven of hardcore gamblers who prefer tea to cocktails, a bowl of noodles to a five-course meal and a quick change of underwear to a night in a luxurious hotel room. Most Macau gamblers would rather play baccarat for 24 hours straight than sip a martini in a dinner jacket." Even Cirque du Soleil closed its operations in Macau in 2012 after more than three years of lackluster ticket sales.

Macau is a pure gambling destination that still has room to grow. Analysts at Deutsche Bank forecast that gambling revenue will grow by 20% in 2014. Longer term, total gaming revenue will increase to $77 billion by 2017 and $80 billion to $100 billion by 2020.

Investors have several options to gain exposure to the ongoing Macau growth story.

Las Vegas Sands (NYSE: LVS  ) is one of the better-known casino operators in the region. Run by legendary billionaire Sheldon Adelson, Las Vegas Sands currently operates four properties in the region. Its next project, Sands Cotai, set to open in 2015. MGM Resorts, on the other hand, has one property with a second, MGM Cotai, slated to open in 2016 or 2017.

Analysts at Citi might have surprised some when it named Melco Crown Entertainment  (NASDAQ: MPEL  ) as its top global pick. According to the analysts, the company's property Studio City, which is set to open in 2015, is the best located casino in Cotai, adjacent to the Lotus Bridge border. The casino will be the first and most prominent casino that visitors see when they first arrive.

The analysts also favor Melco Crown as a top pick because of its valuation, as shares are trading at ~12 times their 2015 estimated EV/EBITDA. "In our view, Melco Crown's share price is still not fully reflecting potential value enhancement from its Studio City," the analysts wrote.

Melco Crown is the only casino operator that is strictly exposed to Asian properties. Besides Studio City, Melco Crown's Manila project is set to open in mid-2014.

Final thoughts
Foolish investors who want exposure to a strictly Asian gaming operator should invest in Melco Crown. Las Vegas Sands offers a great combination of Asian exposure, particularly in Macau with its soon-to-be five properties, but still maintains some roots in Las Vegas. MGM Resorts is unlikely to be a major player in Macau until its second property opens and has less exposure to the Macau gaming market than its peers. Not that an investment in MGM would be considered bad, but investors need to understand that other names provide better exposure to the international markets.

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Read/Post Comments (5) | Recommend This Article (0)

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 12, 2014, at 10:29 AM, blackjackkid wrote:

    National Harbor is a mini-Macau for MGM and why the stock will continue to outperform the other players.

  • Report this Comment On January 12, 2014, at 11:09 AM, blackjackkid wrote:

    National Harbor will be a gold-mine for MGM and nobody but those who know how wealthy the DC-metro area suburbs are have picked up on this. It's a mini-Macau just for MGM. Turnaround story only getting better while the other gaming names' catalysts are already well- known.

  • Report this Comment On January 12, 2014, at 9:36 PM, walleye117 wrote:

    Vegas lost it's appeal. They want to squeeze every penny they can. Now most of the hotels have a "Resort Fee" It doesn't make me want to come to Vegas, on my budget. I was going every year, up until this last year. I spent anywhere from $2000, to $3000 on my budget for a week. Spending $500 of that on a hotel is still a pretty big bite.

    Hotels like Aria want to get the upper class people, but the problem with that, is they are there to party in the night clubs. They don't come to spend money gambling. Last I hear the Aria was bleeding money.

    The budget Hotels like the Q or Harrah's are trying the same thing, but they're losing the gambling crowd and getting the shopping crowd. So far I"m not impressed with the new look of the Q. It has ugly colors, and it looks like they got rid of a number of slot machines and spread them out.

    Next time I go, I"m going for the Star Trek convention, the tight slots in Vegas don't thrill me like they use to. Ten years ago, i could at least have a few couple hundred dollar hits to keep the play interesting. They got stingy on the comps also at Caesars. For a weeks worth of gambling between my friend and I we scrounged two meals off the comp card. $6000 between us on the cards.

  • Report this Comment On January 13, 2014, at 1:12 PM, spokanimal wrote:

    Huh?

    Las Vegas Sand's next project in Macau is "Sands Cotai"?

    I think THAT comment harkens back to your comment about "living under a rock for the last few years"...

    ... because it appears as though it is YOU who has been living under a rock, Mr. Derrick.

    To clarify for your now-confused readers, Sand's most recently completed resort was the "Sands Cotai Central", which is 3 resorts (Sheraton, Holiday Inn and Conrad) build on 2 parcels (#5 and #6) with 2, separate casinos (Himalaya and Pacifica).

    In essence, that means that Sands actually has 5 resort "sites", not 4, and 6, separate hotel brands.

    Mr. derrick's reference to an upcoming resort named "Sands Cotai" is actually a resort that will be called "Parisian"...

    ... but he did get ONE thing right... it WILL open in late 2015 on it's current construction timeline.

    Spokanimal

  • Report this Comment On January 13, 2014, at 4:45 PM, Boner wrote:

    Very clever, the way the writer of the article seems to paint Vegas in a very positive light. That naughty Macau !! Catering to those nasty gamblers. Everybody knows (this is nowhere) Vegas is a free-for-all family paradise that doesn't even give a thought to turning you upside down and emptying your pockets of every last dime before they send you back home wondering what happened. And the numbers!! 100,000 + visitors a day, on average, all year round. Pretty impressive. Good to hear all the rumors of it crumbling to dust because of all the Indian casinos draining it of its lifeblood are false. Go Vegas !! Keep squeezing, Lincoln's bound to scream eventually. I say 8 to 5 Atlantic City topples first but don't quote me. Me, I'm just a lawnmower - you can tell by the way I walk.

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