The gaming industry has had a tough go over the past couple of years because of economic and political pressures, as well as changing consumer preferences. Despite these headwinds, MGM Resorts International (MGM 4.06%) and Las Vegas Sands (LVS 6.29%) have continued to develop new properties, and each has plenty of opportunities -- and challenges -- ahead. Here's a summary of these companies and why one looks like a better bet now.
Las Vegas Sands and Macau's recovery
Macau has not been an investing highlight in the last two years, since Chinese officials decided to curb gaming growth by limiting visits and total gambling spend there. The resulting drop in gaming revenue hurt all of the gaming operators in Macau, and new development looked more like a risk than an opportunity. However, after year-over-year declines in 26 consecutive months, August finally came through with a 1.1% total gaming revenue increase.
While it's certainly too early to call this a turnaround, it could be the bottom of Macau's drop, and there are plenty of reasons to think there are still long-term gains to be had. The most important reason is a focus on the mass market, led by tourism and entertainment growth, instead of just VIP gambling.
In mid-September, Las Vegas Sands opened The Parisian Macao, adding to its four other properties in Macau, which together now hold more than a third of all hotel rooms there. "We believe the Parisian strengthens the company's stranglehold on Macau's mass market, and walked away convinced that Sands' business model is the most attractive vehicle to express our conviction in Macau's long-term potential," CLSA analyst Jon Oh wrote in a note explaining his outperform rating on Las Vegas Sands after visiting the new resort.
Outside Macau, Las Vegas Sands also has resorts in Singapore and the U.S., but gets the majority of its total EBITDA (earnings before interest, taxes, depreciation, and amortization) from Macau. Las Vegas Sands has no major developments in the pipeline now, and is unlikely to get a major bump from this new resort as it's only an incremental addition to its already massive Macau operations. Still, overall regrowth (or at least stabilization) in Macau could help Las Vegas Sands grow earnings once more.
MGM remains strong in the U.S.
MGM is also working on a Cotai resort, slated for a 2017 completion and expected to contain 1,600 rooms. This will be MGM's first resort on the Cotai Strip, and its second in Macau. While MGM is also likely to benefit from long-term growth in Macau, its operations there are far smaller than those of Las Vegas Sands. Instead, it's the U.S. that makes up most of MGM's growth prospects.
MGM has 11 properties on the Las Vegas Strip, controlling around 50% of the hotel rooms there. While gambling revenue is growing only slowly in Las Vegas, MGM is making big investments in convention and other entertainment growth, such as its recently opened 20,000-seat arena and massive new convention centers at some of its properties that look promising for future earnings growth. MGM CEO Jim Murren estimated in a recent CNBC interview that 75% of the revenue in Las Vegas is nongaming, and stated his company is the best-suited with its focus on entertainment and conventions.
Outside Las Vegas, MGM expects to get a big boost in 2017 from the opening this winter of MGM National Harbor in Prince George's County, Maryland, near Washington. Financial data agency Fitch Ratings believes MGM National Harbor could give MGM a $240 million EBITDA boost. MGM management is also feeling optimistic about the resort and recently raised its 2017 year-end total EBITDA target from $300 million to $400 million.
MGM vs. Las Vegas Sands on financials
|Metric||MGM||Las Vegas Sands|
(first 6 months of 2016, YOY)
|Net income growth
(first 6 months of 2016, YOY)
(first 6 months of 2016, YOY)
(using 2017 earnings estimates)
|EV / EBITDA||12.5||14.8|
MGM has had a very successful start to 2016, with income in the first six months more than doubling over the same period last year, while Las Vegas Sands is suffering from the decline in Macau with a 34% income decrease. Even though MGM is still trading at a negative price to earnings ratio given its loss over the trailing 12 months, its forward P/E is actually less than Las Vegas Sands'.
One thing Las Vegas Sands offers that MGM doesn't is a high dividend. Shares of Las Vegas Sands yield over 5%, whereas MGM doesn't offer a dividend. Because of the financial strain Las Vegas Sands has been under the past two years, it's reasonable to question if this dividend is safe. Las Vegas Sands increased its dividend payout 30% last year compared to 2014 and is on track to do the same this year. If Macau operations can start to pick up again, that dividend should be safe. If not, a cut could drive the stock price down considerably as income investors retreat from the stock.
The better buy
While MGM's income success has been impressive so far this year, there's one major area of concern that investors need to watch -- MGM's rising debt, which was approaching $13 billion as of the most recent round of financing completed in August. While Las Vegas Sands is certainly not debt-free at around $10.3 billion in total debt, that's a much smaller percentage of the overall business since Las Vegas Sands is much bigger. Las Vegas Sands' debt-to-equity ratio is just 0.28, while MGM's stands at 0.73.
MGM has an impressive array of new developments across multiple regions, and it looks like the company is making a lot of smart moves to capture new business such as convention space in Las Vegas. Still, much of that growth is financed on the back of new debt, which should be a point of concern for long-term-focused investors. MGM's recent growth could definitely be a sign of more growth to come, and the company isn't one I would bet against -- but with a stronger balance sheet and the chance to gain on Macau's recovery, Las Vegas Sands continues to look like the better buy.