Two of the biggest powers in the gambling industry, both in the U.S. and in Macau, are Las Vegas Sands (LVS 3.44%) and Wynn Resorts (WYNN 2.67%).They should be on the top of the list for any investor looking into the industry. But which one is a better buy today? Let's compare the two stocks.
What investors are getting in gaming
The first thing to do is establish where these companies operate and what investors are paying for each company. Both Wynn and Las Vegas Sands get most of their revenue from Asia, with the remainder coming from the U.S. So, from a market-exposure perspective, they're relatively similar.
Where they differ is in sheer size and level of risk. Las Vegas Sands has a market cap of $45.8 billion, net debt of $8 billion, and EBITDA (earnings before interest, taxes, depreciation, and amortization) -- a proxy for cash flow generated from a resort -- of $4 billion in the past year. The enterprise-value-to-EBITDA ratio of 13.5 gives us an idea of where valuation of the stock stands.
Wynn Resorts, on the other hand, has a market cap of $9.5 billion, net debt of $7.3 billion, and EBITDA of $1.2 billion. The EV/EBITDA ratio of 14.2 is higher than that of Las Vegas Sands and is driven by a proportionally higher level of debt. But it doesn't include a key addition to the portfolio.
Two new resorts changing Macau's gaming market
What's changed in the last few months alone is the addition of Las Vegas Sands' The Parisian and Wynn Resorts' Wynn Palace on Cotai in Macau. The properties will add to the cash flow at both companies, but won't do so in the same proportions.
Let's assume that both resorts generate $500 million in their first year open, and all other properties perform exactly the same. In that case, Wynn Resorts' EV/EBITDA ratio falls to 10 and Las Vegas Sands' ratio falls to 12. As the smaller company, Wynn gets a bigger boost from the new resort.
There's also reason to believe Wynn Palace will significantly outperform The Parisian. Wynn Las Vegas and Wynn Macau both outperform neighboring Las Vegas Sands resorts, so there should be even more upside for Wynn Resorts than the valuation I outlined above.
The downside of being the smaller player
The upside at Wynn is definitely higher, but the downside is greater as well. Las Vegas Sands has managed to reduce its net debt/EBITDA ratio to just 2, which is much lower than the 6.1 for Wynn Resorts (both are calculated on a trailing basis). If Macau's gaming market declines, it will be Wynn Resorts that feels the pain first. Las Vegas Sands is simply on better footing for investors looking at downside risk.
Where will Macau go from here?
The battle between these two companies really comes down to the future of Macau. If Macau stabilizes or grows -- and signs in recent months point in that direction -- Wynn Resorts will be the better-performing stock. But if Macau declines, Las Vegas Sands will perform better because it has less leverage on its balance sheet.
Given the growing evidence that Macau has at least stabilized, I think Wynn Resorts is the better stock between the two. But investors need to be mindful of the risks because this is a highly leveraged company that has to prove its new resort can perform as well as investors hope.