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.
Time the market, or...?
In investing, some people say that "timing is everything." Problem is, time is rarely a singular event.
Take yesterday, for example, when the investment bankers at Craig-Hallum initiated coverage on major Macau casino players Las Vegas Sands (LVS +2.60%), Wynn Resorts (WYNN 0.90%), and MGM Resorts (MGM 1.69%), and told investors to buy two of 'em (Sands and Wynn), while having positive things to say about MGM as well). In all likelihood, C-H thought itself quite clever, slipping in its endorsements right after Reuters reported that gaming revenues in the Chinese gambling enclave had hit consensus targets, risen 8% year over year, and were on track to reach $38 billion in toto, a number six times bigger than the annual take in U.S. gaming capital Las Vegas.
They would have been right... except for the fact that no sooner had C-H published its endorsements than another report was released Tuesday. This one announced that Chinese regulators are threatening to crack down on Macau junket operators who finance gambling expeditions to the enclave by loaning money to the gamblers, potentially denting the growth rate in gambling going forward.
Oops.
Within hours of that latter report being released, shares of MGM were down 2.5%, Sands was down 2.8%, and Wynn had lost 2.9%. Melco Crown Entertainment (MPEL +0.53%), a stock that's made even bigger bets on Macau, relative to its operations elsewhere, dropped a staggering 7%. In each case, the "Chinese crackdown" news obviated the "good gaming revenues" news, and wiped out all the gains (and more) racked up in the previous day.
...time in the market?
Clearly, picking the right time to dive into Chinese gaming stocks is no easy matter. There's no telling, for example, whether the next press release out of Macau will be one describing better revenue growth in December, or worse, new Chinese regulations on gambling junkets, or confirmation that the regulatory threat was really just a regulatory bluff.
But if an investor can't invest based on the headlines, though, what can he do with these stocks?
The answer, appropriately enough, is to "hedge your bets." If you want a piece of the action in Macau, at least do yourself a favor and buy only the best bargains, so that if future news is bad, you've less money to lose, and if future news is good... you've got more room to the upside. And how do you know which bargain is best?
The numbers tell the tale:
|
Company |
P/E Ratio |
Price-to-Free Cash Flow |
Projected Growth Rate |
|---|---|---|---|
|
Las Vegas Sands |
26.6 |
26.3 |
12.6% |
|
MGM |
negative |
7.6 |
6.7% |
|
Melco Crown |
19.1 |
negative |
36.9% |
|
Wynn |
21.0 |
10.1 |
10.2% |
So what can we glean from these numbers at the major Macau operators? Well, right off the bat I think we can agree that Las Vegas Sands is a loser. Whether valued on GAAP earnings or real cash profits, the stock's mid-20s ratios mean it's simply overpriced relative to the low-teens growth rate that Wall Street expects it to achieve over the next five years.
MGM, in contrast, looks interesting. Unprofitable from a GAAP perspective, it's unlikely to draw much attention from investors who focus on P/E to the exclusion of all else. Meanwhile, the company's prodigious free cash flows make it an interesting bet, despite industry-low growth expectations. In the end, though, high debt levels (MGM bears more than $11 billion in debt, net of cash) make this bet, too, too risky to take.
Melco Crown offers an interesting play for the non-risk-averse. On one hand, it boasts the fastest expected growth rate of any casino operator out there -- more than twice its reported P/E. On the other hand, Melco has never been particularly diligent about updating investors on its cash position. Current free cash flow data is hard to come by, so if you want to invest in this one, you pretty much have to take it on faith that Melco's GAAP bookkeeping tells the whole story. (Hint: I'm not much for taking companies on faith. Trust but verify, you know?)
Foolish takeaway
When you get right down to it, therefore, I think the best bet in betting on Macau today remains Wynn Resorts. It's got the second-lowest P/E ratio on offer, and the second-lowest price-to-free cash flow ratio to boot. Debt levels at Wynn are moderate -- about $3.2 billion net of cash on hand. And the unassuming 10% growth rate is nonetheless right in line with the firm's price-to-free cash flow ratio.
Toss in a modest 1.8% dividend yield, and I think investors just might have found a winner in Wynn.
