I'm back on the search for the top stock in gaming. The past three months have been eventful in the world of gaming, particularly in Macau. For the first time in recent memory, Macau's growth has fallen below double digits and came disturbingly close to declining in July.
So let's look at what's going on with gaming and who's dealing with it best.
What's up with Macau?
The problem in Macau is primarily in the hands of VIP players. These high rollers are brought in by junkets and play for a day or two at private high-limit tables, leaving gobs of money behind as profit for the casino. In general, about 70% of Macau's gaming revenue comes from these high-end players.
What's changed in recent months is that players have slowed down their play. Wynn Resorts (Nasdaq: WYNN) felt it, Las Vegas Sands (NYSE: LVS) experienced it on Cotai, and to a lesser extent Melco Crown (Nasdaq: MPEL) dealt with it.
|
Company |
Q2 2012 Rolling Chip Volume |
Change From Q2 2011 |
Q2 2012 Non-Rolling Chip Drop |
Change From Q2 2011 |
|---|---|---|---|---|
| Wynn Macau | $30.3 billion | (7.2%) | $671.8 million | (2.7%) |
| The Venetian Macau | $11.2 billion | (16.5%) | $1.0 billion | (0.3%) |
| Sands Macau | $6.2 billion | (20.5%) | $717.1 million | 0.5% |
| City of Dreams | $19.1 billion | (1%) | $822.5 million | 9.6% |
Source: Company filings.
Even Marina Bay Sands' rolling chip volume was down 5.9% in the second quarter. Clearly, Asia's slowing growth is affecting VIP play, and it affected the profitability of gaming companies in the second quarter.
But as you can see, mass-market play isn't taking nearly the same hit. City of Dreams had a big increase, and losses in VIP play at the other resorts didn't translate to the mass-market side.
A look at value
With that backdrop in mind, let's look at what we're paying for each of these gaming stocks. I use a ratio that takes the enterprise value (which includes equity and debt financing) divided by EBITDA for each company. This allows us to consider debt and EBITDA as a proxy for the cash that is spit off by a casino.
|
Company |
Market Cap |
Net Debt |
EBITDA |
EV/EBITDA |
|---|---|---|---|---|
| Wynn Resorts | $10.5 billion | $3.3 billion | $1.62 billion | 8.52 |
| Las Vegas Sands | $35.1 billion | $5.8 billion | $3.80 billion | 10.76 |
| Melco Crown | $6.6 billion | $531.8 million | $930.7 million | 7.64 |
| MGM Resorts (NYSE: MGM) | $4.9 billion | $11.9 billion | $1.68 billion | 10.03 |
| Caesars Entertainment (Nasdaq: CZR) | $917 million | $19.0 billion | $1.98 billion | 10.02 |
Source: Company filings.
First off, we can eliminate MGM Resorts and Caesars Entertainment from the top-stock discussion. Caesars relies heavily on regional U.S. gaming markets, and most of these markets have been in decline. MGM is more Las Vegas-centric, which isn't a strong position, either, and while I don't hate the stock as much as I do Caesars, the debt load and relative value are enough to keep me out.
The three remaining companies are a little closer, but there's one big thing to consider. Las Vegas Sands is in the process of opening the second phase of Sands Cotai Central, which has contributed only $51.8 million of EBITDA to the results. In the past I've anticipated $1 billion in EBITDA from this resort, but considering the decline in EBITDA at The Venetian Macau and the uncertainty in Macau, I will project an additional $800 million in EBITDA ($850 million total) for Las Vegas Sands because of this new resort. That brings the company's EV/EBITDA ratio to 8.89.
The biggest difference between these three companies is their growth prospects. Wynn is building a new resort on Cotai, which will be the company's third major resort. Las Vegas Sands has Lot 3 in Macau, the company's seventh major resort, and Melco Crown is finalizing a stake in a property in the Philippines and owns a 60% stake in Cotai's Studio City. The Philippine casino is the closest to completion but probably won't have the same impact as the other two.
Final call
With all of this in mind, I think the low valuation of Melco Crown and potential upside of developments makes it the best buy in gaming for the next year. Wynn comes in a close second with its conservative management and large development on Cotai, but the project is too far out for the stock to overtake Melco.
As far as Las Vegas Sands is concerned, the company's value isn't as strong as Wynn or Melco right now. I'm also worried that Sands Cotai Central is taking business away from The Venetian, which we clearly saw in the second quarter. In fact, the new resort seemed to help its neighbor City of Dreams, which is owned by Melco Crown. Similar to Wynn, Lot 3 is too far from completion to bump the stock up another notch, and in Las Vegas Sands' case. the impact of one more casino will be smaller to the company than an additional casino is for Wynn or Melco Crown.
Right now, the best stock in gaming is Melco Crown, a stock that you may be surprised to hear has outperformed rivals over the past one, two, four, and five years (the Year Three win goes to LVS).
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