A 79.7% drop in gambling revenue in the world's largest gambling market (Macao) is rarely seen as a good thing, but there are some small signs of hope for Macao right now. Sure, gambling revenue was just $664 million for the region in March, but the drop in revenue wasn't 100%, which it might be for most U.S. casinos in April. Visitors are slowly returning to resorts in Asia, and that may be the best place to look for an industry recovery.
For the companies with operations there, Macao could be a preview of what's to come in the U.S. and become a steadying force for casino stocks. It won't be a cash cow the way it's been for over a decade, but if it's not a cash drain, that may be all that investors can hope for.
Macao's return will be closely watched
It's no surprise that gambling revenue in Macao dropped 79.7% in March, but this comes after an 87.8% drop in February, which included a 15-day shutdown of resorts. So, the conditions are getting better, at least on a relative basis. We can also now assume that Macao won't be a total loss for casino operators between March and whenever business gets back to some level of normal. That should help casino operators' balance sheets.
As companies go into survival mode, any cash a company can generate will be important. I'll use operating expenses minus depreciation plus interest expense as a proxy for quarterly cash costs to run Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN). Based on those metrics, Las Vegas Sands needs $2.42 billion each quarter to pay all expenses and Wynn needs $1.36 billion. Some costs can be cut with resorts closed, but for simplicity's sake, let's assume that's their cash outlay while fully shut down.
Las Vegas Sands and Wynn Resorts both have enough cash to pay their bills for a little less than two quarters (not including the $600 million Wynn Resorts raised last week). That's not long if resorts are completely shut down.
Any revenue contribution at all from Macao would reduce the rate of cash burn for both companies. Wynn Resorts generated $1.12 billion of revenue in Macao in the fourth quarter. If we estimate that revenue drops 80% to $223 million in the near term, this would be cash coming in to partially offset operating expenses.
Las Vegas Sands' fourth-quarter Macao revenue of $2.24 billion would be reduced to $448 million with an 80% cut. Then there's any revenue that the still-open Marina Bay Sands in Singapore could generate over the next few months.
If Macao generates a little bit of revenue for these companies, it could begin building a small bridge to the future and show signs that a recovery in U.S. gambling is on the horizon.
Macao casino stocks are where investors should be looking
Macao is at least a month ahead of the U.S. in handling COVID-19, so investors can look there for signs of what a recovery may look like. For now, operations are opening, but at a much-reduced level. If revenue improves in the coming months, it'll be a good sign for the industry.
Meanwhile, most U.S. resorts are shut down, and there's no good projection on when they will open again. Casino companies in the U.S. are going to have to cover operating costs without the benefit of even a little cash flow.
Companies that have operations in Macao -- like Las Vegas Sands, Wynn Resorts, and MGM Resorts -- will at least be able to reduce their cash burn short-term, and in a best-case scenario will have a source of cash from the region later this year.
I think investors looking to dip their toes back into casino stocks would be wise to look at companies with operations in Macao and other parts of Asia first. They're likely to be the first to get back to "normal" operations and generate any kind of revenue. In the U.S., the road to recovery may take a lot longer.