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The Top Stock in Gaming

Gaming continues to be one of the hottest industries on the market, with each of the industry's biggest companies easily outpacing the market's gains over the past year. Las Vegas Sands (NYSE: LVS  ) , Wynn Resorts (NASDAQ: WYNN  ) , Melco Crown (NASDAQ: MPEL  ) , and MGM Resorts (NYSE: MGM  ) are each up at least 60% and even Caesars Entertainment (NASDAQ: CZR  ) is doubling the market's gains.

LVS Total Return Price Chart

LVS Total Return Price data by YCharts.

The reason for success in gaming is simple: Macau has been growing like crazy and even Las Vegas is starting to improve slowly but surely. The result has been rapidly rising profits and rising stock prices as well. So, as I've done for three years now, I'm on a quest to find the best stock in gaming (find the last two years here and here).

Value of gaming stocks
The easiest way to value gaming stocks is to look at their entire value, including both equity and debt, and divide it by earnings before interest taxes and depreciation (EBITDA), which is a proxy for cash flow. EBITDA is used because gaming companies invest billions of dollars to build resorts with the promise that those resorts will spit out cash.

Below, I have the shown the inputs to this ratio as well as the enterprise value/EBITDA on the far right.


Market Cap

Net Debt

EBITDA (Trailing 12 Months)


Las Vegas Sands

$68.6 billion

$6.2 billion

$4.77 billion


Wynn Resorts

$23.5 billion

$6.2 billion

$1.81 billion


Melco Crown

$22.9 billion

$812.7 million

$1.29 billion


MGM Resorts

$13.1 billion

$11.8 billion

$2.33 billion


Source: Company earnings releases and SEC filings.

As you can see, Melco Crown is by far the most expensive followed by a virtual tie between Las Vegas Sands and Wynn Resorts and MGM Resorts being the cheapest.

One thing I'm not accounting for here is that Las Vegas Sands, Wynn Resorts, and MGM Resorts don't own 100% of their Macau assets. Las Vegas Sands owns 70.2% of Sands China Ltd., Wynn owns 72.3% of Wynn Macau, Limited, and MGM owns 51% of MGM China.

I've also left Caesars Entertainment off the table above because I don't think it's a viable company long term. It's pushing valuable assets down to subsidiaries in an effort to retain some value in case of bankruptcy. But the operating company may still be forced to give up some of those assets if bankruptcy occurs, and I'm not willing to take the risk on Caesars's new complex operating structure.

Opportunities for growth
Now that we've defined a baseline for value, we need to look at growth opportunities. There may be opportunities for growth in places like Japan, but for now let's just look at the properties we know will be built. Las Vegas Sands is building The Parisian, Wynn is building Wynn Palace, and MGM is planning to finish a Cotai resort in 2016 as well. Melco Crown owns 60% of Studio City, which is expected to be an entertainment resort but is yet to get approval for table games.

With the addition of one resort to the single resort each company already operates, the largest impact on earnings from the Cotai additions will go to Wynn and MGM. Each company should more than double EBITDA in Macau when the new resorts open, which puts them on the top of the list of gaming stocks right now.

Las Vegas Sands simply runs into the law of large numbers when adding another resort to three already open on Cotai and four total in Macau. Another resort will be great but it won't double revenue or EBITDA, making the stock less attractive than Wynn based on current valuations.

Since Melco Crown hasn't yet been approved for table games on Studio City, I don't know how financially viable the project can be. Then there's the Philippines, which is an unknown gaming market where Melco Crown is only a part owner. The market is pricing Melco Crown as if these projects will be huge successes. I see many unknowns, though, and think it's too big a risk today.

The top stock in gaming
We're down to Wynn Resorts and MGM Resorts as the top two stocks in gaming. MGM has the leverage to be a better stock but it also has higher risk in Las Vegas. Wynn has much higher exposure to Macau. However, it doesn't have the same leverage and is trading at a higher EV/EBITDA multiple to start with.

When it's all said and done, my decision comes down to growth opportunities in Macau, where Wynn is head and shoulders above MGM Resorts. Its land concession is much larger than MGM's and it's proven the ability to generate more revenue from table games there as well. If Las Vegas grows, MGM may in fact be the better stock due to leverage, but with valuations as high as they are, I'll stick with the safer bet and that's Wynn Resorts.

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Read/Post Comments (3) | 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 March 18, 2014, at 3:08 PM, berg80 wrote:

    From Sterne Agee's post Q4/FY report......

    Valuation. With both City of Dreams, Manila and Macau Studio City (halfyear)

    included into CY15 estimates, MPEL trades at 13.1x EV/EBITDA, well

    below peers – LVS ($78.79, Buy) and WYNN ($221.28, Neutral) at 15.5x, 18.3x,

    respectively. Based on its pipeline and weighting to mass/premium mass gaming,

    we do not believe MPEL’s discount to peers should exist. Our price target goes to

    $57 from $54 based on our sum-of-the-parts valuation.

    Sometimes, Travis, it pays to look past the now and consider what is down the road.

  • Report this Comment On March 18, 2014, at 4:52 PM, spokanimal wrote:

    A point of clarification in regards to your comment:

    "Las Vegas Sands simply runs into the law of large numbers when adding another resort to three already open on Cotai and four total in Macau. Another resort will be great but it won't double revenue or EBITDA, making the stock less attractive than Wynn based on current valuations"

    ... One aspect of Sands China that has been true since their beginning on Cotai back in 2007 is their concept of "critical mass". In that regard, Venetian was vastly over-built as the first Sands resort on Cotai, with the assumption that an eventual critical mass of resorts on Cotai would one day optimize such a massive structure.

    Sure enough, while Venetian was over-the-top enough in it's early years to be a "must see" and become immediately profitable, the fact is that it has never come close to being a fully utililized asset. In fact, practically EVERY Sands resort experiences a lower table utilization than it's nearby competitors and as recently as 2012, Venetian's mall was still doing far fewer sales per square foot than Wynn's smaller mall downtown.

    That said, it's fair to say that given Sand's lower capacity utilization(s) and optimal geographic positioning to benefit from the development of other operators (and it's own visa-vi Cotai Central), gives Sands the most to gain as table capacity has become tight and as other cotai resorts provide the much-ballyhoo'd "critical mass".

    In fact, Q4 was an excellent example of that, as Cotai Central's vast hotel capacity pushed Venetian's casino revenues up by 40% on relatively flat "hold" and mall & MICE activity increased 22 and 61% respectively. Sand's plaza casino also benefitted substantially once the noise of hold was removed for Q4.

    So, Travis... when you suggest that Wynn and MGM have more to gain from their new resorts, given how much they would goose revenues relative to the fact that each operator currently only has one other resort in Macau...

    ... you are correct... but given the demonstrated beneficial impact that ALL new cotai resorts will have on existing, Sands resorts... you are wrong to insinuate that it would be in close approximation of the percentage of current capacity that each new resort would add.

    Lets leave it at that... best not to muddy the water with the omission of the St. Regis tower and other such impacts.


  • Report this Comment On March 18, 2014, at 9:29 PM, cp757 wrote:

    Travis has always pumped WYNN because he own's it but if you do a five year chart on LVS,WYNN, and MGM you will see that Las Vegas Sands is the clear winner. Its up over 4000% and Travis has said it was a bad stock every year for the past five years. Very sad.

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Travis Hoium

Travis Hoium has been writing for since July 2010 and covers the solar industry, renewable energy, and gaming stocks among other things.

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