Are Macau Casinos A Buy After The Recent Price Drop?

Shares of the leading casino companies are down during the last month as monthly visitation drops for the first half of April. For long-term bulls like me, this is a great opportunity.

Seth McNew
Bradley Seth McNew
Apr 21, 2014 at 11:00AM
Consumer Goods


Reports of a declining number of visitors to Macau during the first part of April, as well as general market declines, left shares of each of the four major Macau casino company shares down recently. For the past month, Las Vegas Sands (NYSE:LVS) is down more than 9%, Melco Crown (NASDAQ:MLCO) is down almost 14%, and Wynn Resorts (NASDAQ:WYNN) and MGM Resorts (NYSE:MGM) are both down around 8% for the start of the week.

Why share are down recently
Wells Fargo analysts, the ones who reported the decrease in Macau visiting numbers for the first part of April, have said that the drop in visitors could potentially be due to poor weather in the region during the last few weeks. The report claimed that revenue was down 17% to 21% in the first six days of April, compared to the same days during the first part of March.

As for the full month of April, as well as the second quarter, the analysts noted that this could lead to a drop in growth from a high of 19% in Q1 to the mid-teens in Q2. The Wells Fargo statement said, "Our Q2 Macau estimates are based on 15.5% yr/yr growth for April and Q2 market growth of 14.2%, down from 19.8% growth in Q1."

Why I'm an even happier investor
As a long-term bull on this industry, I've been excited for the opportunity to add to my positions that this recent drop provides. With shares down, these companies could now be cheap enough for those who want to get in, or add to their positions, preparing for more growth and record-setting profits later this year and in the years to come. Industry trends of mass market growth, and prospects for more expansion in Japan, make me comfortable that a strong bet will continue to be a good long-term play.

The company piquing my interest the most in this drop is Las Vegas Sands. The innovative gaming company has a forthcoming casino resort opening on the Cotai strip, the main strip of casinos in Macau, in mid-2015. Wynn's and MGM's new resorts are expected to be completed sometime in 2016. This new resort, called The Parisian, will include 3,300 new hotel rooms, more than the 1,600 to 2,000 rooms which are being included in the other resorts being built in the area. Sand's bet on mass market consumers has played well during the last five years, and should continue to prove profitable going forward.

Source: Las Vegas Sands 2013 10-K presentation.

Source: Las Vegas Sands 2013 10-K presentation.

Betting on mass market growth
Las Vegas Sands has already captivated analysts and investors with industry-leading growth in 2013. That growth is continuing, and Las Vegas Sands posted 48% growth in March 2014 year over year. This has been spurred on by switching focus from VIP players to more mass-market gamers, and Sands continues to lead in this new trend.

For investors who are wondering whether growth in Macau can continue, and where that growth will come from, consider that Las Vegas Sands has seen 58% growth in mass-table revenue during the last five quarters. With increasing ease of transportation thanks to a bridge being completed from Hong Kong to Macau, and an intercity rail system linking the island parts, larger volumes of consumers coming to the island will only get easier.

Macau is not the only profit driver going forward
Finally, Macau is not the only market that Las Vegas Sands is gaining from. While Macau provides a large part of the company's Asian earnings, which account for 86% of the company's total revenue, the gaming company also gets revenue from operations in Singapore, where it is one of only two integrated resorts allowed in the country. Sands is also a forerunner in the quest to be the first casino company allowed to build in Japan, when the government finally opens its legislation to all integrated resorts in the country during the next few months. This diversified Asian presence keeps Las Vegas Sands in the comfort zone of having diversified revenue, while still focusing on the highest growth regions in Asia. 

Source: LVS 2013 Q4 Earnings Release

Investors' Foolish conclusion
Macau has had such incredible growth during the last few years -- up to 19% during 2013 -- that a drop to 15% growth might look like a bearish sign for the gaming island. As a long-term investor, consider that 15% growth is still an incredible rate for an entire industry. Looking at individual companies in this industry, Las Vegas Sands seems to be the most well equipped to win from mass-market gamers, as well as more growth around Asia. However, all of the companies, including Wynn, MGM, and Melco Crown, are likely to continue benefiting from these growth trends, and Foolish investors should stay alert regarding this industry, looking for the right time to buy in. This recent drop in share prices, making the stocks more reasonably valued, could be that time.