These 3 Casino Stocks Have Explosive Potential

After news broke that Macau's gambling industry grew rapidly over the past quarter, shares of companies like Las Vegas Sands, MGM Resorts, Wynn Resorts, and Melco Crown shot up. Is now still the perfect time to jump in for amazing gains?

Apr 2, 2014 at 4:15PM

After news broke on April 1 that casino revenue in Macau rose for the third consecutive month, shares of several casino operators soared. Compared to the same month last year, monthly gross revenue for "games of fortune" jumped 13% from 31.3 billion patacas to 35.5 billion patacas ($3.9 billion to $4.4 billion). Coupled with the 40% increase reported in February and the 7% improvement in January, total revenue for the year, measured in Macau's local currency of patacas, has risen 20% to 102.2 billion patacas ($12.8 billion USD).

Given this great news, which casino operators should investors consider as a way to capitalize on the growing gambling trend?

Picture

*data in patacas
Source: Gaming Inspection and Coordination Bureau in Macau

The pure play in Macau
Probably one of the best prospects for investors to consider is Melco Crown Entertainment (NASDAQ:MPEL). With all of its operations located in Macau, the casino operator has about as much exposure to the market as investors could desire. This has paid off recently.

Melco Crown      
  2013 2012 2011
Revenue (billions) $5.09 $4.08 $3.83
Percent of Revenue 100% 100% 100%

Source: Melco Crown Entertainment

Over the past three years, Melco has seen its revenue grow an impressive 33% from $3.8 billion to approximately $5.1 billion. Despite seeing mediocre performance in its Altira Macau location, the top line at the company's City of Dreams resort leapt nearly 34% for the year.

However, investors shouldn't expect Melco to be a pure play on Macau forever. Later this year, the company will be opening its much-anticipated City of Dreams Manila resort. Located in the capital city of the Philippines, management expects its first international casino to set the stage for further growth and value creation for shareholders.

Wynn isn't winning
Aside from Melco, another big play on Macau is Wynn Resorts (NASDAQ:WYNN). As of its 2013 annual report, management attributed about 72% of the company's revenue, which equates to approximately $4 billion, to its Macau operations. This is almost three times larger than the $1.6 billion the business chalked up to its domestic operations in Las Vegas.

Wynn Resorts      
  2013 2012 2011
Revenue (billions) $4.04 $3.67 $3.79
Percent of Revenue 71.9% 71.3% 71.9%

Source: Wynn Resorts

While Wynn has greater diversification than Melco, there is some downside associated with it. On top of the slow revenue growth reported by the company's Las Vegas properties, the business has been unable to experience much growth in Macau. As a percentage of sales, the company's Macau operations have not grown since at least 2011. This means that management is either being lackadaisical about growing or is unable to compete with other casino operations like Melco.

Las Vegas comes to Macau
Another strong play on Macau's growing casino business has been Las Vegas Sands (NYSE:LVS). With $13.8 billion in revenue for its 2013 fiscal year, Las Vegas Sands is the largest of the casino operators profiled here. What's more staggering is that 65.3% of its revenue, at nearly $9 billion, came from its operations in Macau, up from 52.4% of revenue in 2011.

Las Vegas Sands      
  2013 2012 2011
Revenue (billions) $8.99 $6.58 $4.93
Percent of Revenue 65.3% 59.1% 52.4%

Source: Las Vegas Sands

Over the past three years, Las Vegas Sands has been successful at focusing more of its efforts on developing in Macau. The company is so intent on grabbing a large market share in the region that it's currently working on opening one of its two new casinos there while completing the remaining phase of its development of Sands Cotai Central. If successful, this would increase the company's locations in the region from four to five.

Can MGM step up its game?
Finally, we arrive at MGM Resorts International (NYSE:MGM). In terms of total revenue, which amounted to $9.8 billion in 2013, the company is the second-largest casino player profiled here. But it has the smallest amount of exposure to Macau. At the end of its 2013 fiscal year, the company only derived about 33.8% of its revenue from the region.

MGM Resorts      
  2013 2012 2011
Revenue (billions) $3.32 $2.81 $1.53
Percent of Revenue 33.8% 30.7% 19.5%

Source: MGM Resorts

Admittedly, this is up from the 19.5% reported in 2011 (though that metric is a bit off since its exposure began in June of that year) and 30.7% in 2012. But it still remains a fraction the size of its rival's exposure. However, management has demonstrated an intent to increase its market share in Macau, as shown by the $2.9 billion MGM Cotai project the company is developing.

Foolish takeaway
Given the good news of continued growth in Macau's casino market, investors are right to expect positive results coming from businesses that have some exposure to the region. Moving forward, it's uncertain if this trend can continue. But for the Foolish investor who believes that it can, an investment in any of these companies might make sense.

For those who are particularly bullish, it would be a wise idea to consider a stake in Melco or Las Vegas Sands because of their performance lately. MGM might also be a win for investors who are confident in the company's ability to grow its market share in the region. Meanwhile, Wynn's inability to grow its operations in the area significantly may be a sign that its prospects are the most limited.

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