At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best
Is it time to roll the dice on MGM Mirage (NYSE: MGM)? The smart stock pickers at Bernstein seem to think so. On Monday, the brokerage house upgraded shares of MGM to "outperform" on the theory that the casino is "becoming a serious player in Macau."

As reports this morning: "For the past two quarters, MGM has had a 10-11% share of the gross gaming revenue (GGR) in Macau versus a prior share of 7-8%." This has Bernstein thinking that even if the new Galaxy hotel opening and additional properties from Las Vegas Sands (NYSE: LVS) eat away at market share "somewhat," MGM is still a good bet, since the market over there is growing faster than expected. Latest estimates show Macau's gambling market accelerating to 35% year-over-year growth.

For this reason, Bernstein says it's finally "time to take MGM seriously in Macau." It may not be as profitable an operator as Wynn (Nasdaq: WYNN), but it is at least a "viable competitor with substantially enhanced bottom-line prospects." Is Bernstein right?

Let's go to the tape
It depends. The main problem with this rating, to a student of history, is Bernstein's own limited history in the hotels, restaurants, and leisure industry. Of the half-dozen picks Bernstein's made here over the past couple years, only two seem particularly relevant to the resorts business that MGM's in. Worse, these two picks are split down the middle, performance-wise. Bernstein bet on black and won with Royal Caribbean Cruises, garnering a 64-percentage-point outperformance of the market. However, it lost 15 points on its recommendation of Carnival Corp.

Still, that's a winning day at the tables, and Bernstein's done even better with its restaurant-centric picks in this industry -- calling it right on Starbucks, McDonald's, Darden, and Brinker. Overall, the analyst has a sterling record of 71% accuracy in the industry.

Playing the odds
That said, I would like to see a few more (successful) casino picks in Bernstein's record, but for the time being that doesn't seem to be in the cards. Instead, let's crunch a few numbers for ourselves.

According to public filings, MGM is not currently a profitable company. It's got no trailing P/E, nor any forward P/E either (because analysts don't expect it to earn a profit any time soon). And yet, things aren't quite as bad as these GAAP numbers make MGM seem.

Fact is, while not yet GAAP-profitable, MGM is profitable where it counts -- on the cash flow statement. Here we see MGM generating $385 million annually in cold, hard free cash flow. It's been free-cash-positive on this basis for three years running now, and was close to it in 2008 as well. This is particularly important as MGM works to pay down its mammoth $11.6 billion net debt load.

A good bet, a better one …
Valued on its free cash flow, and taking into consideration its net debt, I see MGM trading for an enterprise value about 46 times its annual free cash flow. That sounds like a lot, but with analysts projecting a 39% annual growth rate over the next five years for the company, it may actually turn out to be a reasonable price. Still, if this is the way you want to look at the casino industry, an even better bet might be the Fool's own Motley Fool Global Gains recommendation: Melco Crown Entertainment (Nasdaq: MPEL), which boasts several advantages over MGM:

  • First, it's already (barely) profitable under GAAP. Melco booked a two-cent-per-share profit over the past 12 months.
  • Second, like MGM, it's generating tons of cash. While figures for the most recent quarter aren't yet in, 2010 results showed Melco generating $200 million in free cash flow annually, enough to give the stock an EV/FCF ratio of 34. That's cheaper than MGM.
  • Third, and finally, despite being the cheaper play, Melco is pegged for faster growth than its rival. According to consensus estimates, Melco's set to grow 69% per year over the next five years.

You've seen the rest, but Wynn's still best
Granted, 69% annual growth seems like a bit of a stretch. I'd be shocked if that's the way things actually turn out. Then again, 39% growth at MGM would also amaze me. If you believe the numbers Wall Street is tossing about, Melco looks to me like a better bet than MGM.

And yes, for the record, I still believe Wynn is the best bet of all. Its 18 EV/FCF is the cheapest casino play around, it's got a growth rate similar to MGM's, and considerably less debt. Ranked in order of preference, I'd say I like Wynn best and Melco next. MGM comes in only third, and I wouldn't touch Las Vegas Stands with a 10-foot croupier's stick.

Which casino operator do you think will win the race to profits? Add all four to your Fool Watchlist, and watch 'em race 'round the track, 'round the clock.

Fool contributor Rich Smith does not own (or short) any company named above. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Melco Crown Entertainment, McDonald's, and Starbucks. You can find Rich on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 448 out of more than 170,000 members. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.