Last month I called Melco Crown
Macau's slowdown continues
One of the concerning trends for gaming investors is the drastic slowdown in Macau's gaming growth. In the last few years, investors could count on tremendous growth in Macau's gaming numbers to drive earnings up across the board. But in three of the last four months, gaming revenue has only risen in the single digits, highlighted by a 1.5% increase in July.
This is a concern for every company with exposure to Macau, because this has been the driver of growth.
Supply still constrained
The flip side to Macau's slowdown is the constrained supply for the next few years. Las Vegas Sands is continuing its phased opening of Sands Cotai Central, but when that is complete next year, the industry will go into a period where supply will remain constant for a few years.
Las Vegas Sands, Wynn Resorts, MGM Resorts
Attractive end markets
Melco Crown has the advantage of being the only major gaming company that only has properties in gaming's most attractive markets. Las Vegas Sands and Wynn Resorts have large properties in Las Vegas. MGM Resorts is still a Las Vegas-centric company and Caesars Entertainment
Melco is also adding a resort it partially owns in the Philippines and another joint venture at Studio City in Macau. The Macau and Philippines markets should continue to grow more than U.S. markets (although growth may slow) and provide positive trends for Melco Crown.
Where Melco Crown still has a clear advantage over its rivals is in value for investors. The company trades at an enterprise value of 8.5 times property EBITDA, lower than the four rivals I've mentioned. Las Vegas Sands trades at 11.6 times EBITDA, Wynn 9.2 times, MGM 10.3 times, and Caesars 10.0 times. Even if you add a potential increase of $1.0 billion in EBITDA (which is likely an overestimate) for Las Vegas Sands' Cotai Central resort, the largest gaming company in the world still trades at 9.2 times EBITDA.
Value is important because over the long-term, gaming stocks will be priced based on the cash flow from their businesses, which is why we use EBITDA as a proxy.
What I'm concerned about for all gaming stocks is that value has increased sharply in the last few weeks. With growth slowing in Macau, an EBITDA above 8 isn't a screaming buy to me like it would have been a year or two ago.
Foolish bottom line
We won't likely see much growth in earnings from gaming companies in the short term and could see a decline again in the third quarter, so I'm not nearly as bullish as I once was. Melco Crown may still be the best stock in gaming, but it isn't a great buy at the current price.
Over the next few days, if gaming stocks hold their gains, I will look at taking some profit off the table heading into a quarterly announcement that probably won't be impressive for anyone in gaming. I've learned that when gaming stocks are no longer a value, it's time to cash in your chips. I think we've reached that point for the time being.
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