The past five years have seen a flurry of activity in the gaming sector, with expansion in Macau and Singapore highlighting the industry's growth. Now that Las Vegas Sands' (NYSE: LVS) Sands Cotai Central has begun to open, the growth phase is complete for the time being, and we can evaluate gaming stocks on a relatively level playing field without too much projection.
As I do every quarter, I'll try to find the best stock in gaming by looking at valuation and growth prospects. But before we get to the best stock right now, let's see what's happened since the last time I analyzed these stocks.
Retracing our steps
On March 12, I picked Las Vegas Sands as the top gaming stock because the stock had finally become reasonably valued in comparison with its peers. But the stock has performed slightly worse than Melco Crown (Nasdaq: MPEL) over that time and well underperformed Caesars Entertainment (Nasdaq: CZR), so my pick wasn't spot-on this time.
All companies with operations in Macau have taken a tumble along with the rest of the market, pushed further lower by somewhat disappointing results in Macau. After exploding for years, gaming revenue growth has begun to slow and is reaching something of a steady state. Since May of last year, monthly revenue has been relatively consistent, an indication that double-digit growth may be coming to an end. As the market digests this new trend, these stocks have stagnated.
Where we are now?
In the gaming industry, I find that the most effective way to value stocks is by looking at the enterprise value-to-EBITDA ratio. EBITDA is a good proxy for the amount of cash being spit off by casinos, and the enterprise value makes us include debt that companies have piled up.
In the following table, I've compiled the relevant information for Las Vegas Sands, Melco Crown, Wynn Resorts (Nasdaq: WYNN), MGM Resorts (NYSE: MGM), and Caesars Entertainment. The EV/EBITDA ratio in the rightmost column gives us an idea of where each company stands on valuation.
|
Company |
Market Cap |
Net Debt |
EBITDA (TTM) |
EV/EBITDA |
|---|---|---|---|---|
| Las Vegas Sands | $36.4 billion | $5.8 billion | $3.9 billion | 11.0 |
| Melco Crown | $6.6 billion | $875 million | $930.7 million | 8.1 |
| Wynn Resorts | $11.5 billion | $3.6 billion | $1.6 billion | 9.3 |
| MGM Resorts | $5.3 billion | $11.8 billion | $1.7 billion | 10.2 |
| Caesars Entertainment | $1.6 billion | $18.9 billion | $1.9 billion | 10.7 |
Source: company filings.
Right off the bat we can eliminate MGM Resorts and Caesars Entertainment from contention as the top gaming stock, because they have higher EV/EBITDA ratios than their competitors, operate in much slower-growing markets, and carry huge debt loads.
Accounting for Sands Cotai Central
Before we compare the remaining three companies, we need to adjust our view of Las Vegas Sands, which recently began opening Sands Cotai Central in Macau. As I've done previously, I will assume the resort will generate about $1 billion in EBITDA, based on The Venetian Macau across the street and the resort's size, and adjust the EV/EBITDA ratio appropriately.
This adjustment gives our projected view of Las Vegas Sands a ratio of 8.7 instead of 11.0, more in line with Melco Crown and Wynn Resorts.
The winner is ...
With Cotai's resorts rounding into form, it is becoming apparent that Macau's gaming revenue is shifting away from the Macau Peninsula to Cotai. Wynn Resorts is dependent on the Macau Peninsula until its new resort opens in 2016, at the earliest, so that knocks the most conservative gaming company down a notch and out of contention, for now.
Melco Crown and Las Vegas Sands both get a majority of their Macau revenue from Cotai, making them the top to stocks in gaming. Just based on valuation, I am going to have to lean toward Melco Crown right now. The company will be able to leverage Sands Cotai Central just by being located next door, and it still has room to improve operations.
Las Vegas Sands does have a crown jewel in Marina Bay Sands in Singapore, but the relatively simple analysis I did earlier doesn't account for the fact that the company only owns about 70% of its Macau operations. Melco owns all of its operations in Macau.
Melco also doesn't have to contend with the law of large numbers the way Las Vegas Sands does. As a company becomes larger, it becomes harder to grow, so Melco has upside if Studio City on Cotai is granted table games. Las Vegas Sands may be able to find places to grow, like Spain, but I see a giant project like the one being planned in Spain as highly risky in a part of the world that is already full of casinos.
I am adding an outperform CAPScall on Melco Crown to My CAPS page to stay accountable to my readers and track this pick's progress.
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