2014 has been a tough year for gaming stocks, with a major downturn occurring since the beginning of March. Investors are concerned that a crackdown in money laundering out of Mainland China will hurt gaming revenue, something I've highlighted as a major risk in the past.
Right now, gaming companies don't see money laundering as a big risk, and so far there's not a big crackdown on money flow or visas from Mainland China. But it's concerning nonetheless, and stocks have reacted negatively.
Finding value in gaming stocks
The good news for investors is that the decline in gaming stocks presents a much better entry point for investors. Gaming companies haven't been this cheap in over a year, and with growth continuing in Macau, the market looks attractive.
The best way to value gaming companies is to add together their market cap and net debt for total enterprise value and divide that by EBITDA, which we use as a proxy for cash flow from resorts. As you can see below, Las Vegas Sands (LVS 0.53%), Wynn Resorts (WYNN 0.18%), and Melco Crown (MLCO 1.75%) all trade for a similar multiple based on trailing results. Only MGM Resorts (MGM 0.24%), which only has one resort in Macau, trades at a lower multiple of 9.8.
| Company |
Market Cap |
Net Debt |
EBITDA |
EV/EBITDA |
|---|---|---|---|---|
|
Las Vegas Sands |
$60.5 billion |
$7.0 billion |
$5.1 billion |
13.3 |
|
Wynn Resorts |
$20.5 billion |
$2.9 billion |
$1.8 billion |
12.9 |
|
Melco Crown |
$18.4 billion |
$129 million |
$1.4 billion |
13.2 |
|
MGM Resorts |
$11.9 billion |
$12.0 billion |
$2.4 billion |
9.8 |
Source: Company earnings releases and SEC filings.
The big difference between these companies is their growth opportunities. Wynn Resorts and MGM Resorts are more than doubling their capacity in Macau over the next few years, and Melco Crown has two resorts under construction as well. Las Vegas Sands, on the other hand, only has one new resort to add to its stable of four resorts in Macau and one in Singapore. It will have to make up the difference in capacity growth with organic growth.
Melco Crown's resort in the Philippines will provide growth, but no one knows how profitable it will be until it opens. Image source: Melco Crown Philippines.
Assessing where the growth is
Melco Crown is the biggest question mark right now because it's unknown how big the Philippines market is or when Studio City in Macau will get gaming tables. On the open market, Melco's stake in the Philippines is worth less than $1 billion, so it's not material at the moment. Studio City also isn't approved for table games, which are critical to making the resort profitable. For that reason, I'll eliminate them in favor of companies with more certain futures.
Las Vegas isn't a huge growth engine, but it's turned positive, which is enough to get bullish on MGM Resorts.
At similar multiples, I also prefer Wynn over Las Vegas Sands because Wynn has a larger growth opportunity on a percentage basis when it opens Wynn Palace on Cotai in less than two years.
But the best stock in gaming right now is MGM, for two reasons. First, MGM has similar upside on Cotai to Wynn when it opens its new resort, but it also has higher leverage. The $12.0 billion of net debt on the balance sheet is no longer a weight on operations with both Macau and Las Vegas growing consistently and instead gooses shareholder returns. Leverage of course brings in risk if gaming turns negative, but I think the risk of that is low right now. That's why MGM is my top stock in gaming right now.
