Is Now the Time to Bet on Discounted Casinos?

Since being hit hard on April 7, shares of some casino operators like Melco Crown, MGM Resorts, Las Vegas Sands, and Wynn Resorts appear to offer some hot prospects. Which of these investments should the Foolish investor consider jumping into and which are mediocre plays?

Apr 12, 2014 at 10:00AM

On April 7, when the S&P 500 declined 1%, one of the hardest-hit sectors was gaming. Shares of several key casino operators fell precipitously during the day. Since then, the S&P has fallen another 1% while casino operators have dropped even further.  Some of the most severe corrections for the week included MGM Resorts International (NYSE:MGM), Melco Crown Entertainment (NASDAQ:MPEL), Las Vegas Sands (NYSE:LVS), and Wynn Resorts (NASDAQ:WYNN). After seeing these key players in the gambling business fall so hard, should the Foolish investor take the opportunity to buy them at a discount or is there more trouble ahead?

Company Percent Down for the Week Current Price
MGM Resorts 5% $24.13
Las Vegas Sands 4% $36.08
Melco Crown 3% $75.32
Wynn Resorts 1% $211.23

Source: Yahoo! Finance

Is gambling going down?
According to Wells Fargo (NYSE:WFC) analyst Cameron McKnight, revenue in Macau, one of the world's top gaming markets, fell between 17% and 21% in the first six days of April as compared to the same period last month. This implies that the industry's average daily revenue fell between $113.1 million and $118.9 million versus the $143.2 million per day recorded in March.

This news about the region marks a drastic reversal from how well business has done so far throughout 2014. Through March, revenue in Macau grew 20% to $12.8 billion from the $10.7 billion experienced during the same timeframe last year. In light of this tremendous improvement over the past year and in spite of the drop in revenue for the month of April thus far, Wells Fargo expects the average daily revenue in Macau to come in around $142 million for the rest of the month.

  2014 2013 Change
January $3.6 billion $3.4 billion +7%
February $4.8 billion $3.4 billion +40.3%
March $4.4 billion $3.9 billion +13.1%

Source: Gaming Inspection and Coordination Inspection of Macau

Who's the best player here?
For investors looking for exposure to Macau, the most interesting players appear to be Melco Crown and Las Vegas Sands. As of the end of each company's most recent fiscal year, they both held sizable and growing stake in the region. Melco Crown, for instance, reported that all of its $5.1 billion in revenue during 2013 came from Macau, up 33% from the $3.8 billion management reported for its 2011 fiscal year.

Moving forward, Melco is intent on growing its presence in the gaming industry. Management hopes to do so in part by investing outside of the region. In 2014, the company plans to open City of Dreams Manila, located in the capital city of the Philippines. This will represent the first endeavor outside of Macau for the company and one that it hopes could be its first step into international operations.

Las Vegas Sands is also a power player in the region. In 2013, the company reported that 65.3% of its $13.8 billion in revenue, which converts to $9 billion, came from Macau. This is up from 52.4%, or $4.9 billion, in sales seen during the company's 2011 fiscal year.

Other candidates aren't so hot

Casino Revenue

Source: Melco Crown, Wynn Resorts, Las Vegas Sands, and MGM Resorts

While both Melco and Las Vegas Sands have been growing rapidly, and with the latter increasing the percent of revenue it earns from the region, other players like Wynn Resorts and MGM Resorts don't come across as terribly exciting. Over the past three years, for instance, Wynn Resorts hasn't done too much to increase its exposure to Macau. Between 2011 and 2013, the company's percent of revenue derived from the region stayed about level at 71.9%.

MGM Resorts was more active, but still lacks a great deal of exposure to the region. As of the end of its 2013 fiscal year, only about 33.8% of its revenue came from operations in Macau. While this is up from the 19.5% of sales reported in 2011, it's still a fraction of what its peers have.

Foolish takeaway
Based on the data provided, it looks as though investors are concerned about a prolonged downturn in gambling in Macau. Such an occurrence would have a devastating impact, particularly on Melco, Las Vegas Sands, and Wynn Resorts, but this doesn't seem to be playing out.

Admittedly, the fall in revenue in the region is bad for business in the short term. If Wells Fargo is right and the drop is due to poor weather conditions, though, business should quickly rebound. For this reason alone, the Foolish investor might find a casino play that has a significant degree of exposure to the region to be a very rewarding prospect.

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