Are Casinos About to Be Hit Hard by a Downturn?

In light of data that says Macau's casino industry is shrinking, the fact is, the region may still have plenty of room to run. The only question for those who believe this is which company, between Melco Crown, Las Vegas Sands, and Wynn Resorts, will have the best chance of capitalizing on a booming gambling industry?

Jul 8, 2014 at 5:00PM

Picture

Source: Melco Crown. 

After news broke on July 1 that Macau's gambling revenue for the month of June had taken a beating, shares of casino operators with a presence in the market popped up. The two biggest movers were Melco Crown Entertainment (NASDAQ:MPEL) and Las Vegas Sands (NYSE:LVS), which both rose more than 2%, while Wynn Resorts (NASDAQ:WYNN) saw its shares inch up 1%. In light of this development, it seems odd that some of the companies with the most exposure to Macau's (apparently) shrinking market are seeing investors pile in. Is it possible that there's something more at play here?

Macau shrank... so what?
For the month of June, gross revenue stemming from games of fortune declined 3.7% to $3.41 billion from the $3.54 billion reported the same quarter a year earlier. In spite of this decline, however, the bigger picture still seems to be rather healthy. Year to date, Macau's casino revenue has jumped 12.6% to $24.19 billion this year from $21.48 billion seen during the same six-month period in 2013.

Picture

Source: Gaming Inspection and Coordination Bureau of Macau (Industry).

To put this in perspective, Las Vegas, the U.S.' gambling hub, reported gaming revenue of just $7.2 billion in the first five months (June data has yet to be released) of 2014. This represents roughly flat revenue compared to the same time last year.

According to analysts, the drop experienced by the casino industry last month was driven by gamblers electing to wager on the World Cup being held in Brazil. With this major event in mind, analysts anticipated Macau's gaming revenue to decline anywhere from 2% to 6%, so actual results came in a bit on the lower end of the distribution.

Picture

Source: Las Vegas Sands.

Although it may seem unlikely for a soccer tournament in Brazil to draw such a large amount of revenue from Macau, evidence suggests this type of scenario may not be too far out of the question. On June 19, police arrested 22 individuals stationed between mainland China, Malaysia, and Hong Kong for running an illegal $645 million betting syndicate in Macau whose sole purpose was to place bets on the outcome of the World Cup. This amount alone more than makes up for the drop in gaming revenue seen in June compared to the same month last year.

Who's most likely to benefit moving forward?
Based on the data provided, it's possible Macau's gambling industry could have seen an increase this year in comparison to last year had it not been for the World Cup. In the event that the adjusted upward trend in the market continues, companies like Melco Crown, Las Vegas Sands, and Wynn Resorts could provide the best opportunities for the Foolish investor.

Currently, Wynn Resorts is one of the largest players in Macau's booming market. In 2013, the company generated about $4 billion in sales from the region, up nearly 7% from $3.8 billion in 2011. While this is good for the company's shareholders, there is one problem with the casino operator.

(2013 Macau Exposure) Revenue Percent of Total Revenue
Melco Crown $5.1 billion 100%
Wynn Resorts $4.0 billion 71.9%
Las Vegas Sands $9.0 billion 65.3%

Source: Melco Crown, Wynn Resorts, Las Vegas Sands.

Unlike rival Las Vegas Sands, Wynn Resorts has seen its percentage of sales coming from the area stay virtually flat at 71.9%. This suggests the company's exposure is very high, but management is unable to scale up into the region, or is unwilling to do so for the sake of the benefits that come with diversification.

Las Vegas Sands, meanwhile, generates a more modest 65.3% of its sales from Macau, but in dollar terms of nearly $9 billion, the company trumps Wynn Resorts. Even more impressive than this, however, is the casino operator's dedication to growing its market presence in Macau. Over the past three years, management at Las Vegas Sands has increased its sales stemming from the region from a far lower base of $4.9 billion, which converts to 52.4% of the company's consolidated revenue.

Picture

Source: Wynn Resorts.

While both Las Vegas Sands and Wynn Resorts generate a hefty percentage of their revenue from the region, the best pure play in the market appears to be Melco Crown. In each of the past three years, Melco Crown's revenue has come exclusively from Macau and has seen its top line grow 33% from $3.8 billion to $5.1 billion. This rise in revenue beats out the 7% increase experienced by Wynn Resorts and isn't terribly shy from the 46% growth posted by Las Vegas Sands.

Foolish takeaway
Given the information released concerning Macau's gaming market, some investors might be hesitant to take a stake in any companies with a great degree of exposure to the region. However, when you consider that there is sufficient evidence supporting the assertion that the decline in the region's gaming industry was caused by the World Cup, these concerns should melt away.

For this reason alone, the Foolish investor who can look past the headlines of a falling market in Macau and decides, instead, that the future for these companies will only get brighter, then an investment might make sense. This is especially true for Melco Crown and Las Vegas Sands, which happen to be growing rapidly, and which have a tremendous amount of exposure to Macau's gaming market.

The prospects for Melco Crown and its pers pale in comparison to the next big thing!
Compared to the long-term potential for casino operators like Melco Crown, Las Vegas Sands, and Wynn Resorts, the next big thing to hit cable will let you make money while sitting right in your living room!  That's right, no travel!  You see, cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers