Apparently, it's a moral issue. According to Sheldon Adelson, Chairman and CEO of Las Vegas Sands (LVS -8.66%), online gambling will lead to people losing their homes. He has also stressed that legalized online gambling will lead to young adults under the influence of alcohol and/or drugs making poor decisions, using online gambling as a desperate attempt to climb out of student debt. On top of that, he feels as though online gambling will lead to numerous cases of money laundering, cheating, underage gambling, and have a detrimental impact on land-based casinos. Is he right, or is this just an attempt to shut the door on industry rivals Caesars Entertainment (CZR) and MGM Resorts International (MGM 0.02%)?
Deep pockets
Most CEOs who stand against an inevitable industry trend helplessly shout from the rooftops, ultimately knowing that they can't do anything to stop the oncoming change. This might also be the case for Adelson, but a few things separate him from the average CEO.
One, he's the 11th richest man in the United States. That kind of dough leads to sway. Two, he has political backing. He supports the Republican Party, but he's aiming for a powerful bipartisan effort to prevent online gambling. Some of the names associated with this effort are George Pataki, Blanche Lincoln, and Wellington Webb. Three, when you look at the three resort and casino companies affected by online gambling, including Las Vegas Sands, Caesars Entertainment(CZR), and MGM Resorts International(MGM 0.02%), Adelson's Las Vegas Sands has by far been the most successful. This is a tribute to Adelson's business acumen and strategic thinking. Let's take a look at some comparisons as examples.
Performance comparisons
For instance, look at the top-line comparisons for these three companies over the past five years:
LVS Revenue (TTM) data by YCharts
Las Vegas Sands has also generated $4.05 billion in operating cash flow over the past year. This was more than MGM Resorts at $1.12 billion, and light-years ahead of Caesars Entertainment, which generated negative cash flow of $287.40 million over the same time frame. Furthermore, Las Vegas Sands isn't as leveraged as its peers, and it's more capable of paying down its debts.
Las Vegas Sands has $3.21 billion in cash and short-term equivalents vs. $9.76 billion in long-term debt. While this isn't an ideal balance sheet, when you combine the cash position with the strong cash flow, debt isn't a major concern. MGM Resorts has $1.47 billion in cash and short-term equivalents vs. $13.03 billion in long-term debt. Combined with the company's cash flow, this is a manageable situation. Then there's Caesar's Entertainment, with $1.71 billion in cash and short-term equivalents vs. $21.54 billion in long-term debt. Caesar's is highly leveraged, and its negative cash flow doesn't help.
The point here is that Adelson has led his company to the most success and fiscal stability. Therefore, he might understand the industry landscape best.
MGM Resorts, and especially Caesar's Entertainment, need online gambling to have any shot at thriving. Caesar's Entertainment has been divesting underperforming properties in an effort to improve its bottom line, but in order for the company to drive its top line, it needs online gambling. That said, should Caesar's Entertainment be careful what it wishes for?
Adelson's prophecy
Most people think online gambling would be a positive growth catalyst for land-based casinos, including MGM Resorts and Caesar's Entertainment. They see it as a way to complement their land-based businesses. Adelson sees it differently.
In his opinion, online gambling will be a short-term win for land-based casinos, but a major long-term loss. He believes that online gambling will lead to the cannibalization of land-based casinos. Worse yet, he believes that social media companies, such as Facebook, Twitter, Zynga, or Google, will eventually enter the fray and offer promotions that branded land-based casinos won't be able to compete with. The land-based casinos would be forced to offer consistent promotions, which would lead to contracting margins and bottom-line declines.
The good news for Caesar's Entertainment and MGM Resorts is that New Jersey just rejected an online gambling license for PokerStars, the largest online poker site in the world. That immediately eliminates significant competition.
The bottom line
This situation will take a while to play out. The good news for investors is that the potential of online gambling, combined with the short-term success that Adelson predicts, might drive stock prices higher. On the other hand, these are all highly discretionary names. The current economic environment featuring a cautious consumer isn't likely to bode well for these names over the long haul, especially MGM Resorts and Caesar's Entertainment, which don't cater as much to the high-end consumer. Hopefully, the economy shows sustainable improvements, the consumer strengthens, and all three of these companies return to their heyday status. Unfortunately, that would be a long-shot wager.
