With Macau Stocks Down, Now Is the Time to Buy

Sands' amazing skyline only seems to get brighter each year. Even though investors have worried about the second quarter, the company's long-term growth catalysts are still there. Photo: Las Vegas Sands/ Four Seasons

After Las Vegas Sands (NYSE: LVS  )  reported lower-than-expected earnings per share for its second quarter, and with MGM Resorts (NYSE: MGM  ) and Wynn Resorts (NASDAQ: WYNN  )  reporting in the coming weeks, investors are wondering whether the Macau profit train has run out of steam and if the stocks associated with it have completed the amazing upward trend they have followed during the last few years.

The stocks have been beaten up over the last few months as noise about summer slowdowns and regulatory issues has scared investors, and so far second-quarter earnings releases have emphasized this. Yet Foolish long-term investors can still learn why these gaming companies have plenty of growth left, and why their current price drop could indicate a good chance to get in now.

April showers bring ... July buying powers? 
For its first quarter, Las Vegas Sands posted an over 20% revenue increase with EBITDA at Macau properties up over 50% over the year-ago period. This was well ahead of the results from MGM Resorts and Wynn Resorts, though both of these companies also posted solid year-over-year revenue growth. Following incredible first-quarter earnings releases by each of these three companies, the stocks peaked around March and April.


After five years of incredible growth, Las Vegas Sands and competitors have dipped slightly from peak highs. This might
be the perfect buying opportunity. Sources: Las Vegas Sands, Yahoo! Finance, editing by Bradley Seth McNew

As analysts touted the effects of the World Cup on summer revenue, and regulatory issues cropped up over some illicit banking actions which involved junket operators (companies that help VIP players to get to Macau and play there), investors have wearily cut their bets on these companies. Las Vegas Sands hit a high of around $88 in March before declining to around $74 right before its second-quarter release, and is down slightly from there this week. The stories for Wynn and MGM have been similar over the last two months. The short-term noise that has caused most of this dip is not a long-term issue, so it has created a buying opportunity for long-term investors.

There is one long-term point of concern which stems from these companies' second-quarter earnings: the drop in VIP gaming growth. However, because this forces them to pay even more attention to the increasingly profitable mass-market segment, this will actually lead to a long-term win for these companies. Here's why.

The catalyst for future growth: Macau's mass market
Operations in Macau over the last decade have largely been focused on the profits coming from VIPs, the high rollers of the gaming industry. However, companies will bring in more profit from the mass-market segment of gamblers going forward, and these companies are betting accordingly. The company set to gain the most from this trend is Las Vegas Sands.


Source: Sands 2014 second-quarter earnings presentation

I like Las Vegas Sands
Las Vegas Sands won huge from mass table revenue in 2013, and that trend is continuing in 2014. Focusing on this segment has led to impressive results in mass-market growth which have surpassed the results of other casinos in Macau, including both Wynn and MGM.


Source: Sands 2013 earnings presentation

MGM's US locations, especially in Las Vegas, were once world renowned before everyone focused on Macau where MGM is not as strong. Will that change soon? Photo: MGM Resorts

Jim Cramer of Mad Money likes MGM
Jim Cramer of CNBC's Mad Money likes MGM Resorts. "My new favorite Macau play is now MGM," Cramer said. "It gets 50 percent of its business from Vegas, and right now that may be a positive, as the US is rebounding while I think China could remain volatile for some time."

He agrees that for a more Macau-heavy bet, Las Vegas Sands is strong in Macau and more diversified around Asia. He also sees its value and noted, "Also, I think this stock is a steal here, trading at less than 17 times next year's earnings estimates with a 20 percent growth rate." Still, he puts more emphasis on the potential reward coming from the Las Vegas rebound.

Wynn is the least appealing right now
One place where Cramer and I agree is that Wynn is a last resort. At current levels, the stock seems to have much less upside or investment catalysts than Las Vegas Sands or MGM Resorts. With poorer first-quarter revenue growth, less of a chance for Asian expansion than Las Vegas Sands, and less of a chance to gain significantly from the Las Vegas rebound than MGM Resorts, Wynn doesn't look too hot. Cramer noted that "Wynn gets half of its Macau business from VIPs, exactly the segment of the market that's been getting killed."

 
 

Wynn Resorts

MGM Resorts

Las Vegas Sands

Q1 Net Revenue Growth YoY

9.7%

12%

21.4%

Q1 Net Revenue Growth YoY

TBA

TBA

12%

Share Price in April

$219

$24.33

$76

Share Price in July

$204

$25.5

$73.8

P/E (TTM)

27.6 249.8

24.1

P/E est. 2015

21.4

38.7

16.7

Source: Yahoo! Finance

Foolish takeaway
Macau's gaming industry is still growing incredibly rapidly, and thanks to mass-market growth that should continue. Mass-market growth has helped spur on Las Vegas Sands during 2013, and will continue to do so in 2014 and beyond. Likewise, Las Vegas has recovered slowly from the recession of 2008, but things appear to be picking up there now. This could be a great thing for MGM Resorts in the next few years.

Whether you agree with me more on Las Vegas Sands' great current value and potential to continue driving growth in Asia, or agree with Cramer more on MGM Resorts' ability to gain significantly from the Las Vegas comeback while still benefiting from some Macau growth, you can see that we are both bullish on both of these companies. For investors who are looking to bet on gaming companies, now is looking more and more like the time to buy in on recent share price dips.

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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 July 28, 2014, at 12:44 PM, spokanimal wrote:

    Bradley Seth is continuing to paint LVS is a rosier way than "normalized" results would suggest.

    When adjusted in a way that excludes "luck" (eg: "hold percentage" in casino terminology), LVS advanced their EPS to 87 cents a share in last year's 4th quarter, and it has Leveled Off since then.

    For some reason, Mr. Seth has a Phobia about presenting LVS's results in the far more meaningful "normalized" equivalency. That is why I do not view Mr. Seth's articles as very useful as a way to evaluate LVS in terms of it's "operational efficiency", which would exclude the impact of "luck" at the gaming tables.

    I have commented in this regard REPEATEDLY, and Mr. Seth STILL is not presenting the data in this way... even as a sidebar in his nomenclature.

    This is not to say that LVS isn't performing well. It is simply evidence of the reality that LVS has postponed it's historic emphasis on profits and margins so as to use the hotel room inventory advantage gleaned from the Launch of Cotai Central to secure more market share, which LVS has done admirably, and is STILL doing, as it's Central Cotai occupancy and REVPAR's continue to advance, and it's share of GGR (Gross Gaming Volumes macau-wide) increasingly move beyond 23% toward 24% on a moving-average basis.

    I just wish that Mr. Seth would QUIT with the pie-in-the-sky, "headline" metrics and drill down a little more usefully into what a company like this is actually doing beyond just how far Above or Below, normal-luck the company is rolling at it's tables...

    ... because no matter how elated you might be with the 97 cents LVS made in Q1... or how disappointed you may have been by the 72 cents they made in Q4 of 2013...

    ... the company STILL made 87 cents per share in both of those quarters... once you account for the lousy luck they had in Q4, and the fabulous luck they had in Q1.

    Spokanimal

  • Report this Comment On July 28, 2014, at 9:39 PM, DoubleDownNow wrote:

    I prefer MGM due to it's smaller market cap and the leverage it has to the Vegas market as high-rollers from Macau and elsewhere have started to regularly gamble there as evidenced by the last few months of Nevada baccarat handle numbers.

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